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Oil price above $38 is a rally traders will sell into, not a trend change

A worker stands next to a pump jack at an oil field Sergeyevskoye owned by Bashneft company north from Ufa, Bashkortostan, Russia.
Sergei Karpukhin | Reuters
A worker stands next to a pump jack at an oil field Sergeyevskoye owned by Bashneft company north from Ufa, Bashkortostan, Russia.

The OPEC meeting confirmed that the era of cheap oil has not come to an end.

Chart analysis of the Nymex oil chart in March suggested the rise in the oil price from $28 was a rally and not a trend change. The strong rally gain was a gift to traders but it was not enough to revitalize the oil industry because the rally faced significant resistance barriers.

However, oil is establishing a pattern of longer-term trend reversal with price oscillation around the $38 level. Price activity at this level will be the most significant factor in oil behavior in the next few weeks. If the price remains near to the $38 level, the longer-term outlook for oil is bullish.

If price falls below $38, the next support level is near $28.

However, two barrier features on the chart that act to prevent any future rebound rally at $38 from developing into a trend change.

The first resistance level is a historical one near $48. This resistance feature is strengthened by the proximity to the upper edge of the long-term GMMA, which is also near $48.

The separation in the long-term GMMA is also very wide and consistent, with little indication of compression. A change in trend direction is confirmed when the long-term GMMA group of averages first develop compression, then later turn upwards.

Instead, wide separation in the long-term GMMA confirms that investors are not confident the oil price can recover quickly. This is why the current rally collapse is not a surprise. The width of the long-term GMMA confirms that investors will sell into any future rally, driving oil prices down towards the historical support level near $38.

The second resistance feature is the historical support-and-resistance level near $58 - the most significant resistance level for any trend change. A successful breakout above $48 could move quickly to the resistance level near $58.

When the oil price fell, the downside targets were calculated by taking the width of the trading band and projecting it downwards below each new support level. The trading bands for oil are around $10 wide, which is particularly useful for describing the price fall between $108 and $38.

The same method is used to calculate the upside targets for any new uptrend in oil. However, the strength of the resistance features suggest that any future rebound from support near $38 will be a rally and not a trend change.

We continue to use the ANTSYSS trade method to extract good returns from these price movements.

Daryl Guppy is a trader and author of "The 36 Strategies of the Chinese for Financial Traders," available from www.guppytraders.com. He is a regular guest on CNBC's "Street Signs" and speaker at trading conferences in Asia Pacific and Europe.