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Congestion can be a useful guide to a breakout and if you get the right direction you can make money a plenty. Take a look at the light crude chart:
Chart 1
click chart for more detail
You can see how from October ’07 to March this year we saw oil track sideways for almost four months and then whooshka it breaks out – and to the upside like a rocket. It is like suppression – eventually it breaks out with a vengeance.
And it just so happens I see a similar pattern unfurling as I have marked with parallel lines for June this year. It is tough to see the detail but I am using price bars rather a line chart which I use in 95% of cases. A bar gives you the full extent of the compression because a day’s high and low is very much a part of the range trading bias.
The trick always is to work out which way the break will be – to the upside or downside. In the first example we can see that on four occasions price found support and eventually this base was the launching pad for a push out of the zone.
In the latest example we ideally need a few more days before we can assess which way the break may be. But I am inclined to think it is to the upside as we can see that from the Elliott projections a major trend is still in the making with a first wave five at $145 and a second wave five at $160 – heavens forbid.
So it is a good idea to combine such patterns with a confirmation indicator or the likes.
That is the theory but the reality of oil spiking to the upside is somewhat scary for consumers and economies overall.
Enjoy the ride
Tom Scollon
Chief Analyst
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