OIL INDECISION

The difference between consolidation and indecision is important. A consolidation pattern shows the end of a downtrend and the potential to develop the conditions necessary for a new uptrend. This is a pattern with a high probability of developing a new uptrend.

A pattern of indecision shows the market is uncertain about the future. This is a low probability pattern. The market could jump quickly upwards, or it could quickly fall. There is a 50% probability of a move in either direction because the market is evenly balanced.

The pattern of price movement of the NYMEX (New York Mercantile Exchange) Crude Oil weekly chart in recent weeks shows a pattern of indecision. The chart has developed a symmetrical triangle. The pattern is created when two equally correct, but contradictory, trend lines can be plotted on the chart. The uptrend line in this pattern on the weekly chart starts from the low near $32. The trend line shows buyers are moving into the market. The up sloping trend line shows some buyers are becoming more optimistic.

Other traders have a different opinion. They are worried prices are going to continue to weaken. They are sellers in the market. This selling pressure is defined by the down trend line. This line starts from the high near $56. The two trend lines define two equally correct, but exactly opposite opinions of the market. The symmetrical triangle captures indecision. The balance of probability favoring bulls or bears is evenly balanced. The market can develop a fast breakout in either direction.

The symmetrical triangle is used to calculate the target level for the breakouts. The base of the triangle pattern is measured and this value is projected up and down from the apex of the triangle pattern. The upside projection has a target is between $67 and $70. This is near to a long term resistance support area.

The pattern projection downside target is near $18. This is below the long term historical support level located near $24. This level is clearly seen on a monthly oil chart. A fall to around $24 support will develop if the American economy moves into a severe recession. A fall below this level suggests America is moving into a Depression.

The oil price is developing a better relationship between true demand and supply. This has created the price fall from $145 to around $50. The continued fall in demand created by the problems in the American economy have the potential to reduce demand further. This situation can see the oil price around $24. The chart pattern of indecision will reach the apex of the triangle in 2009, March. Traders will watch carefully for the direction of the price breakout from the chart pattern.



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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.