Oil At US$80/bbl?

Technicals | May 17 2018

Bottom Line 16/05/18

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: 61.78 / 58.01 / 54.91 (new contract)
Resistance Levels: 80.48 / 84.13

Technical Discussion

Oil appears to be flowing freely out of the U.S, especially with shale producers, yet OPEC production cuts are still appearing to have an effect on reigning in supply. What is likely to be one of the bigger fundamental catalysts moving forward though are global geopolitical risks. Front and centre of course is the fragile relationship between Iran and the U.S, especially recently with Trump backing away from it's Nuclear deal and wanting to reintroduce sanctions. And even though everything appears to suddenly have become quite rosy with North Korea, its is questionable that friendships here are going to remain stable for any extended period of time based on history. Then of course there is the inevitable melting pot that is the middle east where stability can change at the drop of a hat.

So the fundamental factors that could come into play affecting prices are wide and varied, yet exactly what is driving prices, either up or down, at any given moment, is purely speculation. In contrast though, the technicals have been very clear and transparent, with price action, volume and patterns, all coming together to suggest that higher prices over the coming months, even years, continues to be high probability. Lets take a closer look. 

Reasons to be positive above [WTI US$/bbl] 60.00:
→ OPEC continues to apply production cuts 
→ supply / demand potentially starting to balance yet reporting needs more consistency
→ price action continuing to be productive bigger picture yet support has to hold
→ the potential for a major low to be locked in is now very real
→ Geopolitical factors

The bigger picture monthly chart on Crude Oil is a very telling one and follows a clear cut pattern when markets collapse. Namely the stages price action goes through until it finally cleans out and locks in a major low point. In this case the pattern that unfolded off the mid 2008 all time highs was clearly (A)-(B)-(C) zig zag in nature. The first Wave (A) being powerful and impulsive to the downside until a significant support area was attained which in this case was around the technical and psychological $100.00 price zone. The initial move is often swift and takes no prisoners and this is exactly how things unfold on the Crude Oil price chart.

The next stage is generally a complex shallow consolidation phase which can sometime lure traders into a false sense of security that the worst is over. This process we labelled as a Wave-(B) with price whipsawing around within a relatively shallow range for over 4 years. Yet as soon as the Wave-(A) low and support line was broken below, price yet again accelerated to the downside via a Wave-(C). Something to keep in mind from a trading perspective is that Wave-(C)'s often unfold as 5-wave patterns. This means that they are excellent trading opportunities due to price reverting from unproductive chop, into impulsive fast moving waves which is the type of price action we all want to be involved in from a trading perspective.

Once price evolves into the 5th and final wave, we then know to keep a look out for a major low point to lock in. We finally got that in February 2016 yet we needed further proof to become more confident in the analysis. This came via the 4th stage which is a shallow sideways basing pattern, with the high stopping volume backing the assumption (see chart). From here the double bottom eventually locked in, triggered above 60.67, with targets aligned to the 80.00 mark. Price last night closed at 71.37 with the whole bigger picture process to this point unfolding pretty much in text book style, be it taking many years to evolve in this manner. So a major bottom is now likely in place, with the next stage being looked at aligned to whether a continuation pattern will develop if and when our 80.00 target is achieved.

See if you can pick the larger bullish pattern on the monthly chart that may develop next, post a breather off 80.00 ? If it forms then triggers, it will see price not only break above 100.00 resistance, it will place it right in the middle of all the major supply that is hanging around between 100.00 and 140.00. A longer term outlook looking forward of course, yet a pretty remarkable, nicely staged recovery if it were to come to fruition.   

Trading Strategy

We recently made some solid profits on our first Crude Oil trade for 2018, and we are now long again with another opportunity triggering at 64.31. Our stop in between reviews has now been moved higher into profit at 65.11. At last close price was trading at 71.37 and we continue to see the potential for our double bottom target circa 80.00 to be achieved over the coming months. A decent breather at these levels though would then be the expectation, before we would look for price action to make an attempt at the all important 100.00 price point. One step at a time ! 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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