Originally published by guppytraders.com
Over time our charts become cluttered with trend lines and other technical indicators. The problem is that these old lines tend to guide our thinking and analysis of the chart. It is very useful every now and then to clear these lines from the chart and start with a naked chart – a chart showing just the candlesticks and no other information.
We do this with the weekly NYMEX oil chart and several features become more apparent. Some are negative, and call for new thinking. Others are new relationships that again call for new thinking.
Between 2015 August and 2016 November the oil chart developed an inverted head and shoulder pattern. This is often a strong trend reversal pattern so the long term analysis suggested oil would develop a new uptrend and move towards $72. This inverted head and shoulder pattern has failed to develop so this analysis can no longer be applied to the chart.
Some believe they can see a head and shoulder pattern developing between 2016 October and 2017 April. They believe this heralds the beginning of a new downtrend with a target near $32. Its very difficult to justify this head and shoulder pattern as its components are not well developed.
The single most important feature that stands pout on the naked chart is the strong support level near $44. This is not an exact level, but this area has been tested consistently from 2015 until the current retreat. Its a central support level and the oil price has oscillated around this level. Starting 2016 April the oil price has stayed above this support level and moved in a prolonged sideways pattern.
The upper edge of the sideways pattern is near $54, making the trading band around $10 wide. This is an interesting coincidence because oil has often trading in trading band around $10 wide. However in the past these were at levels $48, $58, $68, $78 etc. The oil market appears to have re-set these levels with $44 being a central reference point. The trading band above $454 has resistance near $54.
There is a high probability that the downside projection target for the trading band is near $34. This has been a very weak support level in the past so traders take a cautious approach to this target level. What is clear is that a fall below significant support near $44 is very bearish for oil with a potential target near $34.
However, its too early to define a new downtrend so investors watch for evidence of consolidation around the long term support level near $44..
We use the ANTSYSS trade method to extract good returns from these oscillation rally and retreat movements.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.