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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.
A look at the index activity from 2016 until Jan. 29, 2018, shows daily ranges — low to high — are small and about the same size. The general uptrend is not interrupted by days of significantly large daily ranges. It was a smooth, stable trend.
By February 2018 the nature of the trend irrevocably changes — in the extent of volatility and direction.
First consider the volatility. After February the market is dominated by large daily ranges. The daily range between the low and the high expands dramatically and it remains very large — particularly when compared to the daily ranges of the previous two years.
After February the nature of the direction also changes. This is relentless volatility with sharp moves to the downside, fast and short-lived rallies and more market collapses. There is no stable trending behavior. There is no reliable underlying trend.
The U.S. market is faltering as scandals hit companies like Facebook. It's also struggling because larger companies realize the true impact of President Donald Trump's tariff and trade war with China.
Previously, as the U.S. markets went from strength-to-strength, the U.S. dollar index continued to weaken. This was contrary to the normal situation where a strong U.S. market was usually accompanied by a strong dollar.
A weaker U.S. market usually sees a weaker currency, so when this is added to the previous contrary behavior it suggests the greenback could fall further. The dollar index has dropped below the long-term support level near 93 and then below the critical support level near 91.
Temporary support has developed near 88.5. It is a temporary level because there is no previous record of support near this level. This remains a very bearish situation.
Trend analysis is applied using the Guppy Multiple Moving Average indicator. The GMMA analysis shows a very strong downtrend remains in place.
President Donald Trump's plan to impose tariffs on up to $60 billion worth of goods imported from China, and Beijing's response to earlier steel and aluminum tariffs, smashed the Shanghai Stock Exchange index. In the current environment it is difficult to apply technical and chart analysis because the emotion in the market is so strong and volatile.
However, past price activity can provide some guide to how the market may react in the future.
A shock reaction to the trade spat is a clear change in what had been a developing upside breakaway. The pattern of the Guppy Multiple Moving Average trend test and retest has ended.
The potential for a return to new uptrend behavior has also ended. This is confirmed with the gap-down behavior and the clear close below the potential uptrend line A (see chart below).
The Shanghai composite index is developing a classic test and retest pattern that often precedes a major trend reversal. This is a pattern of behavior seen in the Guppy Multiple Moving Average indicator. It is a three-part pattern.
The first part is when a rally approaches the lower edge of the long-term GMMA and then retreats. That's a compression in the short-term GMMA and it happened Feb. 26.
The second part of the test pattern is a rebound rally that penetrates the long-term GMMA before retreating from this resistance feature. The short-term GMMA also turns up and touches the lower edger of the long-term GMMA. That rebound rally and retreat is currently developing.
The Australian dollar challenged a long-term resistance level near 81 and then failed to develop a new uptrend. The retreat took the Australian dollar back to test the long-term support level near 7.75.