Oil Price Consolidation

The NYMEX (New York Mercantile Exchange) Crude Oil chart shows a consolidation pattern following the substantial fall in prices in 2008. The consolidation pattern is a sideways trading band that is defined by long term support and resistance levels. This type of consolidation pattern is also developing in many commodities. The consolidation pattern does not automatically lead to the development of a new uptrend.

The lower level of the trading band is near $32.00. This level has been tested several times in recent weeks. This level is also a strong historical level.

Currently trading has been limited to a price range between $32.00 and $50.00. The $50.00 level does not have any historical significance so there is only temporary resistance near this level. The Guppy Multiple Moving Average (GMMA) relationships on the daily chart show the long term group of averages are beginning to compress and turn upwards. This is a leading indicator of a developing bullish trend change.

A strong resistance level is located near $56.00 and this defines the upper edge of the trading band. This was a very strong support level between 2005 and 2007. In a bear market it is the previous support levels that become very powerful. They act as new resistance levels when the downtrend changes to an uptrend. The fall below $56.00 in 2008 November, established $56.00 as a strong resistance level.

The width of the trading band is $24.00. This value is used to project upside targets for any breakout above $56.00. These targets are located near $80.00. This is a low probability target because there is a very strong resistance level located between $68.00 and $70.00. This level provided resistance and support from 2005 to 2007. This is also equal to the lower edge of the long term GMMA applied to a weekly chart.

The width of the band is also used to project down side targets. These are located near $10.00. The consolidation behaviour suggests there is a lower probability to a move towards $10.00. Consolidation indicates the strength of the downtrend momentum has become weak. Price may dip temporarily towards $26.00 which is a very strong historical support level.

The GMMA relationships show a bullish bias for activity inside the trading band. This suggests there is a high probability trading will continue to move in a rally and retreat pattern between $32.00 and $58.00. This is a move of nearly 80% and offers good trading opportunities. The behaviour in coming weeks will include stronger and higher rallies which tests the resistance level. The price retreats will be less and have a low probability of reaching support at $32.00. The price retreats will develop rebounds from higher price levels and this shows the bullishness of the consolidation 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.

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