This week has been one for the record books. Wall Street went into crisis mode when Lehman Brothers failed Sunday evening and declared bankruptcy. This pushed Merrill Lynch into the arms of Bank of America in a takeover that stunned investors.
And the past 48 hours has seen American International Group teetering on the brink of collapse, culminating in an $85 billion bailout by the U.S. government.
Oh yes and while all this drama unfolded, oil slipped below $100 a barrel on Monday, hardly a blip on the markets' radar.
U.S. crude oil for October delivery , which has tumbled $10 since last Friday and over a third since mid-July, climbed $3.15 to $94.30 a barrel Wednesday rallying on the AIG rescue, after falling as low as $90.51 on Tuesday. What's next for oil?
Oil has developed a parabolic trend. One of the features of this trend is the rapid collapse of the curve when prices move to the right of the parabolic trend line. The fall from $145 to $125 was a signal to sell and sell short.
Several weeks ago, oil was at a balance point as it hovered in the support band near $110 to $113. The failure of this support band was particularly bearish for the oil price. The next support level is near $100 which was achieved the fortnight. And just this past Monday, oil sank below the key $100 level.
The consolidation band between $110 and $113 is a technical consolidation band. It is created by calculating the potential resistance target when prices move above $100. Oil prices hit this level in March 2008 and then retreated.
Prices did develop a small consolidation between $110 and $113 before moving convincingly towards the next technical chart target near $125. The weekly oil chart confirmed the support band between $110 and $113 was weak so the fall to genuine support near $100 is not a surprise.
The strength, or lack of strength in the support and resistance levels established in the fast rise starting January 2008 provides a reliable guide to the pause points and consolidation areas as the oil trend develops downwards momentum.
$100 is a strong psychological resistance level. But it is less powerful as a support level in a falling market. In a rising market, the most recent resistance level provides support for continued upward momentum. In a bear market, the lower levels of trading bands provide support for consolidation patterns.
The top of the very strong consolidation area is located near $100. The bottom of this consolidation band is located near $87, which is the next support target area. The fall below $100 indicates a significant change in the uptrend and confirms the development of a new strong downtrend.
The fall below $110 at the start of September, shows a developing trend weakness. This is confirmed with the Guppy Multiple Moving Averages (GMMA) relationships. The long-term GMMA has turned down and is beginning to compress. This indicates developing downtrend pressure. This is an important development in the last three weeks. Confirmation of the strength of this downtrend pressure is shown when the oil price closed below the lower value of the long-term GMMA near $105.
The confirmation of a substantial downtrend started with a fall below $105 on September 8. This raised the probability of oil falling to the next support level near $100. It also increased the probability that prices would sink to the next trading band of between $87 and $100.
The upper resistance levels in the trading bands limit any price rebounds in a bear market. When prices fall below $100, they can fall quickly to near $87. When it rebounds from $87 it encounters much stronger resistance near $100. There is now a higher probability the long-term downtrend pressure will continue with a move towards $87.
In the next several weeks, traders will watch for consolidation developments under the $100 level. There is a high probability in the long term that oil will consolidate between $87 and $100.
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