The Oil Market - The Power Of Ranges

Aaron Lynch

It is early 2005 and it hasn’t taken too long for me to call up an article on how well milestone theory and ranges work in the Light Crude Oil market. For those watching this market even a cursory view would confirm that ranges repeat and there is power in pressure points. One of the tools that I am always focussing on is the power of the first range out. Usually this would be a focus on big picture setups; however, it can also assist on the more secondary ranges as well.

The chart below is of the light crude oil market and as most would be aware oil made highs of $55.67 last year and sold off quite heavily to the lows of $40.25 in December 2004. The market has made a solid base at the $40 mark and a strong bull campaign has been in effect since then. Measuring the first push out the range was $6.25, measured from point 1 to point 2.

click chart for more detail

Adding that $6.25 range to the next higher bottom as we can see marked by the orange circles, there are areas where the market has found resistance in the move. While their resistance may only be temporary, they can prepare the trading mindset and be proactive in managing our stops.

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This technique allows us to continue to use the value of $6.25 and add it to the next higher swing bottom. The chart below takes a look at this perspective; we had a strong pullback on oil around the $49 mark. The chart below indicates clusters with the previous range at approximately the same point – the 133% milestone of the first range and the 75% milestone of the second.

click chart for more detail

Once again repeating the addition of the first range out to the next higher swing bottom, we see the 50% milestone proving to be of great importance in this move. We often look to the 50% milestone as a point where a market will find significant support or resistance. In the case of the current action, the chart below shows the cluster again around the $49 mark however, the final upswing into the top was $3.04 or $0.08 short of the 50%.

click chart for more detail

Since Australia day this year the oil market has undergone a rather heavy sell off to the $46 - $47 mark. Suffice to say, looking for a potential support and resistance point may require a bigger perspective as a guide.

The final chart looks at the bearish range from $55.67 to $40.25. Using the Gann retracement tool we can see the 50% milestone has been acting as support until the recent falls below. This will prove to be a balance point for this market. We would need to see some solid closes and higher bottoms above the 50% before we might consider a bullish trade.

click chart for more detail

If oil can continue to close and hold below the 50% point the next lower swing top may be an appropriate place to short this market.

Good Trading

Aaron Lynch