Oil is on a steady and sustainable uptrend

  • The oil price behavior sets the next price target near $76 and potentially higher.
  • This is not an erratic breakout trend driven by reactions to global risk factors. This is a steady, sustainable uptrend breakout.
Oil pumpjacks in silhouette at sunset.
Oil pumpjacks in silhouette at sunset.

The NYMEX oil price breakout above $66 comes as no surprise to traders who analyze the price charts.

This price behavior sets the next price target near $76 and potentially higher. Readers will remember that we set $65 and $76 targets in oil notes in 2018 February. These conclusions are derived from analysis of the price chart.

There are three factors to consider in this analysis.

The first factor is the way the weekly chart shows that oil trades in bands. The standout feature on the chart is the strong support level near $43 and resistance near $54. Starting April 2016, the oil price has stayed above this support level and moved in a prolonged sideways pattern.

Support near $43 and resistance near $54 makes the trading band around $11 wide. The breakout above $65 gives the upside projection target for the trading band near $76.

The second factor is the change in the Guppy Multiple Moving Average (GMMA) indicator. The long-term group of averages is well separated and this shows strong and consistent investor support for a rising trend. The degree of separation between the long-term and short-term GMMA is also steady. This again confirms trend strength and stability.

This is not an erratic breakout trend driven by reactions to global risk factors. This is a steady, sustainable uptrend breakout.

The short-term group of averages, which reflects the way traders are thinking, shows a low level of volatility. This tells us that traders are also confident that the trend will continue.

The third factor is the uptrend line that starts from the anchor point near $43 in June 2017. This trend line has successfully acted as a support level and provides a good definition of the rising trend.

The first trend target is near $65, while the second trend target is near $76 and potentially higher. It is higher because the $76 level has no history of providing strong support or resistance.

When the oil price collapsed, the $76 level offered very weak support. The price did not consolidate near this level. This behavior suggests that price has a low probability of pausing or consolidating near this level in the future. The chart further suggests that major resistance will not develop near $76.

The chart shows this is a genuine change in the long-term trend, and that the price behavior has a low volatility. Daily price ranges are constrained. The oil price usually clusters along the upper edge of the short term GMMA. Price corrections remain within the confines of the upper and lower bands of the short term GMMA. We use the ANTSYSS trade method to extract good returns from this trend behavior.

These are all characteristics of a strong trend.

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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