Charting Asia

Fundamentals and trading patterns show US oil is headed higher

Key Points
  • A look at weekly trading patterns for U.S. oil shows the potential for gains.
  • The next target for U.S. crude is $76 a barrel.

Take your pick — $52, $75, $82.50 or $100 a barrel? The outlook for West Texas Intermediate on the New York Mercantile Exchange seems particularly confused with some analysis calling for a fall in contrast to wildly optimistic targets near $100.

All prices are possible, but some are more probable than others.

Crude oil sprays from a well bucket.
Getty Images

All of the fundamental analysis, all of the variables around shale oil production, Middle East troubles and increased demand by China are assessed, balanced, and summarized in the price chart.

Assemble these weeks in a single chart and clear trends and behaviors emerge. These features provide an answer to the most probable, and the least probable, outcomes for U.S. oil prices. Brent crude normally trades at a premium to West Texas Intermediate.

The weekly chart shows that oil trades in bands. The standout feature on the chart is the strong support level near $43. Starting in April 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. Between December 2016 and February 2017 it acted as a strong resistance level. The rapid breakout has shown good follow-through and developed into an uptrend.

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

In the past, oil has often ranged in trading band around $10 wide. The oil market appears to have re-set this spread, expanding to $11. This gives the upside projection target for the trading band near $65, which was achieved in late January.

Trading bands have two important features. The first feature is the way price consolidates near the upper and lower edge of the trading band. It is rare for a rising price to quickly move above the trading band projection level.

The second feature is the way prices develop rally-and-retreat behavior between the upper and lower edges of the trading band. This can prevail for a brief period, or for many months.

The current trading band breakout and retreat is moving toward the value of the uptrend line that started in July 2017. Investors watch for a rebound from this trend line value and a retest of the trading resistance level near $65.

Geopolitical risk has heightened as a factor in crude oil prices

I started by asking you to pick one of the four price targets. The charts show none of these numbers are consistent with trading band analysis.

The next upside target is $76. This is calculated by taking the width of the trading band and projecting it upwards. This analysis method uses the repeated historical behavior of the oil price.

We use the ANTSYSS trade method to extract good returns from this trend breakout and the rally rebounds. Any pullback and successful retest of the trendline support value near $58 is a buying opportunity on the long side for the continuation of the long-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 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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