We know the weekly NYMEX Oil chart shows a long-term inverted head and shoulder reversal pattern. This trend reversal pattern is reliable and has a high probability of reaching the projected price breakout targets. It is a powerful trend reversal pattern, but it's a long term pattern and a lot of things can happen between now and the achievement of the pattern targets.
During this period other chart patterns develop and they help to confirm the longer term pattern. For the past year oil has been trading in an upsloping trading channel. It is not a perfect fit, but the channel captures most of the price behavior.
The upper trend line starts in June 2016 and captures the highs in October 2016 and January 2017. The lower trend line is parallel to the upper trend line. It is not an exact fit, but is starts near the lows of August 2016 and then uses the low of November 2016.
We would not recommend using this trading channel as a basis for entry and exits points. However it is a useful guide to the behavior of price and helps to put the price pullbacks into to context.
We also apply the Guppy Multiple Moving Averages (GMMA) indicator. This confirms a steady uptrend but it also shows that the uptrend is no well supported by investors. The long term GMMA has compressed and turned upwards. This is the characteristic of the beginning of a new uptrend.
However, the long term GMMA has no shown good expansion. It has remained compressed for eight months. In a string uptrend the long term GMMA usually develops good separation. The wide separation acts as a shock absorber for any price retreats as it shows investors will enter the market as buyers.
The compressed long term GMMA has narrow separation and this shows investors are still cautious about future prospects for oil. This is a vulnerable market. It can move easily upwards, and just as easily downwards.
On the balance of analysis this is a bullish chart. The current chart patterns confirm the long term inverted head and shoulder pattern. However the combinations of patterns suggest investors will need patience and will need to wait for some time before the first price target of $58 is achieved.
The historical pattern of support and resistance levels help define the upside targets. The rebound from support near $48 is part of this pattern behavior. Resistance is near $58. A breakout above this level gives a medium term target near $68.
Temporary resistance has developed recently near $54. A breakout above $54 can move quickly to long term resistance near $58.
This chart offers short term trading opportunities which can be exploited using the ANTSSYS method to trade the consolidation behavior. Any breakout above $58 has a resistance target near $68 and this helps validate the head and shoulder price projection target.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
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