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US oil trading band causes a ripple in a market looking for a breakout

  • U.S. crude oil has moved above $54 per barrel
  • An extended trading range to $11 from $10 may signal further gains

The NYMEX breakout above long-term resistance near $54 a barrel for crude oil has caused a ripple of excitement in what has been a largely moribund market in West Texas Intermediate for nearly 18 months. Sure there were trading opportunities in the rallies and retreats between $43 and $54, but slow-moving volatility doesn't make for good trading.

An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.
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An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.

The key question is to decide if the breakout is just a temporary rally, or part of a longer-term trend breakout. The second question is to set the upside targets.

Oil trades in bands. It doesn't trade in trends, or at least it hasn't really done so since 2010. The standout feature on the chart is the strong support level near $43. This is not an exact level, but this area has been tested consistently from 2015 until the most recent retest in July.

Starting in April 2016, oil prices have not stayed above this support level and moved in a prolonged sideways pattern.

The upper edge of the sideways pattern is near $54. Between December 2016 and February 2017 it acted as a strong resistance level. The rapid breakout is generally considered a strong bullish feature, but this breakout has not shown good follow-through.

Support near $43 and resistance near $54 makes the trading band around $11 wide.

In the past oil has often traded in a $10-wide band. The oil market appears to have re-set this spread.

This gives an upside projection target for the trading band near $65. This has been an unimportant technical level in the past so traders take a cautious approach to this target level because there is strong historical resistance near $61. Traders watch for consolidation near this level. A strong breakout above $61 changes this rally into a genuine trend break.

We use the ANTSYSS trade method to extract good returns from this rally, but it is too early to identify this as a breakout. Investors and traders pay particular attention when the price moves above resistance near $54 because a breakout rally could be very powerful and fast moving.

Any pullback and successful retest of $54 as a support level is a buying opportunity on the long side for the development of a longer-term uptrend.

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.