Why recent oil gain does not make an uptrend

The events in Egypt have pushed oil towards new highs but this remains a rally rather than a new uptrend. Nymex crude has been unable to breakout above the upper level of long term resistance near $109.

The fear in oil markets is that the current price activity is part of a new long-term uptrend that may see oil reach highs of $120 or $130. The chart suggests these fears are unfounded because oil trades in well-defined trading bands. The breakout above resistance near $98 had a target projection near $109. Despite the ongoing unrest in Egypt, oil has been unable to breakout above the $109 resistance level.

(Read more: Egypt risk premium built-in, limiting oil's gain)

The weekly Nymex chart shows four levels of support and resistance.

The first level is near $78. The second and third levels are near $88 and $98, respectively. The fourth level is near $109. Oil has traded in a sideways trading band between $88 and $98 since July 2012. The breakout above this trading band in July was not the start of a new uptrend. It was a momentum rally created and now sustained by problems in Egypt. This remains a temporary rally towards resistance near $109. It is not the beginning of a new uptrend towards prices above $109.

(Read more: Rising oil prices: Is it really all about Egypt?)

However this longer term pattern of rally and retreat has created a new condition on the chart – the uptrend line that started in June 2012 from the low near $78. The best placement of the trend line starts near $81. This trend line connects the lows in 2012 November and December. It also joins the low in 2013 April. This provides three anchor points for the uptrend line.

The uptrend line shows oil is in a steady slow moving long term uptrend. The uptrend line shows that the Nymex oil price can retreat to near $93 and continue to remain in a long-term uptrend. A resolution to the Egyptian crisis could see a rapid fall from $109 to near $93 so traders will be ready to switch to short side trading.

The uptrend line gives a long term bullish outlook for oil but it does not suggest that oil will quickly move above resistance near $109. Investors need to watch for a more rally and retreat behavior between the value of the uptrend line and resistance near $109.

(Read more: Terror fears draw buyers of crude oil)

The pattern of horizontal support and resistance lines and an uptrend line often creates an up sloping triangle pattern. This pattern does not appear on the weekly chart. An up sloping triangle pattern must have a well-defined vertical base. This feature does not appear on the graph so we cannot use a triangle pattern to set an upside breakout target.