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Why we need to look at naked charts for technical analysis

  • Old trend lines and indicators on a chart can cloud reading technical signals.
  • It can be useful to start over with a naked chart of just candlesticks.
  • Taking away old lines from the weekly Nymex chart shows clear support levels.

Over time our charts become cluttered with trend lines and other technical indicators. The problem is that these old lines tend to guide our thinking and analysis of the chart.

It is very useful every now and then to clear these lines from the chart and start with a naked chart, showing just the candlesticks and no other information.

We do this with the weekly NYMEX oil chart and several features become more apparent. Some are negative, and call for new thinking. Others are new relationships that also call for fresh views.

Between August of 2015 and November of last year, the oil chart developed an inverted head-and-shoulder pattern.

An oil pump jack in the oil town of Gonzales, Texas.
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An oil pump jack in the oil town of Gonzales, Texas.

This is often a strong trend reversal pattern, so the long-term analysis suggested oil would develop a new uptrend and move toward $72.

This inverted head-and-shoulder pattern has failed to develop so this analysis can no longer be applied to the chart.

Some believe they can see a head-and-shoulder pattern developing between October of last year and April.

They believe this heralds the beginning of a new downtrend, with a target near $32.

It's very difficult to justify this head-and-shoulder pattern as its components are not well developed.

The single most important feature that stands out on the naked chart is the strong support level near $44.

This is not an exact level, but this area has been tested consistently since 2015 through the current retreat.

It's a central support level and the oil price has oscillated around this level. Since April of 2016, the oil price has stayed above this support level and moved in a prolonged sideways pattern.

The upper edge of the sideways pattern is near $54, making the trading band around $10 wide. This is an interesting coincidence, because oil has often traded in a band around $10 wide.

However, in the past, these were at levels $48, $58, $68, $78 etc. The oil market appears to have re-set these levels, with $44 being a central reference point. The trading band above $44 has resistance near $54.

There is a high probability that the downside projection target for the trading band is near $34.

This has been a very weak support level in the past so traders take a cautious approach to this target level. What is clear is that a fall below significant support near $44 is very bearish for oil with a potential target near $34.

However, it's too early to define a new downtrend so investors watch for evidence of consolidation around the long term support level near $44.

We use the ANTSYSS trade method to extract good returns from these oscillation rally and retreat movements.

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.