The behavior of oil in 2009 to 2010 has been dominated by two features. The first is the residual power of the historical support and resistance levels. The most important of these are between $78 and $88. The three recent tests near resistance at $88 created a bullish outlook with a potential to breakout and move to the next resistance level near $98.
The second feature was the development first of an up sloping trend channel. The lower edge of this channel was broken in May and a new lower parallel up trend channel developed. This lower channel has recently also been broken.
It is the pattern of these breaks that point the way to a head and shoulder pattern. The rapid fall from $80.00 and the failure of the rebound is initial confirmation of the head and shoulder trend reversal pattern. If fully completed, it would put a downside target for oil near $54.
The pattern is confirmed in two ways. First when the price fails to rally above $81, which is the height of the right shoulder. This failure confirms the development of the right shoulder of the pattern.
The second confirmation is a move below $65.00. This is the current projection value of the neckline in the head and shoulder pattern. Move below this level is final confirmation of the head and shoulder pattern.
Another confirmation, albiet minor, is a sustained close below historical support near $68. This has been a string support area since December 2009 and a major feature in the 2010 oil market behaviour.
The development of the right shoulder has moved the NYMEX oil market out of the slightly bullish sideways consolidation band and into bearish territory. Traders use more caution in the long side of this market and are more aggressive in talking the short side.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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