OIL AND SUPPORT

The fall in the oil price on the NYMEX (New York Mercantile Exchange) Crude Oil weekly chart below $100 was a move below an important psychological barrier. The price collapse to the support area between $68 and $70 was very rapid. There was a small rise in the oil price between $65 and $70, but then the price retreated to the next support level near $58. This was the first weekly rise in price since the fall below $100. This behaviour is important because it suggests the oil price may develop some consolidation activity.

The weekly price chart of NYMEX (New York Mercantile Exchange) Crude Oil shows a long term consolidation pattern between $38 and $70. The very fast parabolic trend rise in price started from the $70 level and moved to the parabolic trend peak price near $146 before the rapid parabolic trend price collapse.

The period 2005 to 2007 oil traded in a broad consolidation pattern between $58 and $68-$70. From 2004 to 2005 the $48 level was a resistance level. This level can now act as a support level. When prices falls very rapidly it is difficult to exact support levels to be successful. The price will fall past the support level and then rebound. This temporary price fall is called an ‘over shoot”. This suggests price can fall towards the lower edge of support near $48 and then rapidly rebound towards $58. The long term consolidation of price between $58 and $68 suggests there is a high probability the oil price will stabilise and consolidate in this area after a temporary dip towards $48.

A similar temporary dip below support at $58 developed in 2007, January. The rebound from this price dip developed into the beginning of the long term uptrend. This is a low probability development for oil in 2008 because the dip comes at the end of a strong downtrend in prices.

There is a low probability price will continue to fall below $48. If this develops then the next support level is near $38. This is a weak support level that is not well developed. A fall to this level would be a 73% fall from the high price near $145. A fall to $48 is a 67% fall in price. The size of this fall is similar to the price fall in other commodities including Nickel, Zinc, Lead and iron ore.

Consolidation of price activity is a high probability and resistance near $68 will be a strong barrier to any future price rises.



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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.