Has the upward momentum pressure for oil prices disappeared? The NYMEX oil chart seems to have done very little in the past few weeks with the price stuck in a trading range near $104 to $105.
Still, the two notch debt credit trading downgrade for Spain by S&P — which confirms the continued problems in the euro zone — and the sluggish U.S. economic recovery, have not been enough to create a downtrend in the oil price.
The stability of the oil price is bullish and this confirms the power of the dominant bullish chart pattern on the weekly NYMEX oil chart. The pattern is an inverted head-and-shoulder pattern. Normally these patterns develop at the end of a downtrend and they signal a change in the direction of the trend from down to up.
When the inverted head-and-shoulder pattern develops in an uptrend then the analysis conclusion is different. In this situation the inverted head-and-shoulder pattern shows the uptrend will continue. The upside target is now $125.
The left shoulder of this inverted head and shoulder pattern developed near the low of $91 on 2011, July. The inverted head of the pattern develops near $78 on 2011 October. The right shoulder of the pattern is created by the rally-and-retreat behavior near $94 on 2011 December. The neckline of the pattern is drawn between the high of $99 in 2011 July and the high of $101 in 2012 January. The distance between the low of the inverted head and the neckline is measured and used to calculate the upside target.
The value of the neckline provides a support level. This level has been tested several times in April and has provided a good rebound point. This inverted head-and-shoulder pattern also has a strong historical support level near $98. A move to this level is consistent with a continuation of the bullish pattern.
The inverted head-and-shoulder pattern shows a continuation of the uptrend but it does not help to decide when the upside target will be achieved. The pattern also does not provide a method to define how the uptrend will develop. This uptrend could move slowly, or it could move rapidly to achieve the $125 target level.
The most important short term resistance level is near $110. This defines the upper edge of the current consolidation activity in April. The consolidation in April has developed a base for a fast moving breakout. A move above $110 has a high probability of quickly developing a rally breakout to the $125 target.
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.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com.
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