Never mind the pullback, technical analysis shows oil is headed for a rebound

  • The pullback in oil prices takes place within the environment of a well-established uptrend, writes Daryl Guppy.
The Philadelphia Energy Solutions oil refinery in Philadelphia.
David M. Parrott | Reuters
The Philadelphia Energy Solutions oil refinery in Philadelphia.

The NYMEX oil price pulled back to the long-term uptrend line and then developed a strong rebound rally.

That behavior is consistent with a continuation of the long-term trend. It suggests that the recent pullback in the oil price is not an opportunity to go short in anticipation of a trend change.

The price has pulled back from $74 to around $70. This pullback takes place within the environment of a well-established uptrend. Investors watch for the opportunity to add to long positions as the price rebounds from any of the three support features on the oil price chart. The upside target for the trend continuation is $76.

The first support feature is the long-term support level near $65. That level was the support base for the most recent strong rebound rally.

Oil has a well-established pattern of moving in trading bands. The first trading band starts with the strong support level near $43 and resistance near $54. This makes the trading band around $11 wide. Applying the same trade band projection methods gives a long-term target near $76.

The second feature is the location of the uptrend line. It was tested successfully in June 2018 and acted as a base for the recent rally rebound. The current trend line value is around $68.

The third feature is shown with the Guppy Multiple Moving Average indicator.

The long-term group of averages is well separated and this shows strong and consistent investor support for a rising trend. When price retreats, then investors come into the market as buyers. That is the most consistent trend support behavior shown in the GMMA indicator on the oil chart in nearly a decade.

The degree of separation between the long-term and short-term GMMA indicators is also steady. Such a consistent degree of separation is a characteristic seen with stable trends. That again suggests that the current retreat is temporary rather than the beginning of a trend change.

The short-term group of averages, which reflects the way traders are thinking, shows a low level of volatility. The group is not characterized by rapid compression and expansion. That shows traders are buyers whenever the price falls, which tells us that traders are also confident that the uptrend will continue.

Those support features and the trend strength features all suggest that the oil price is experiencing a temporary retreat. The longer-term trading band target is near $76 and potentially higher. It is higher because the $76 level has no history of providing strong support or resistance.

We use the ANTSYSS trade method to extract good returns from the trend behavior.

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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