Oil - On With the Show

Can oil prices continue to go higher?  The simple answer is yes, the ‘where to’ and ‘how long’ are ones that require a little more work.  For the first time that I can remember, most people you meet have an interest in what oil prices are doing, mainly for the reason that it is affecting the cost base of driving ones car.  For some consumers, petrol prices can double and that will not stop them taking the car for a trip to the corner shop, but for many it is becoming a proposition that may be harder to justify. At what price will you put off driving your car?

As a trader with a keen interest in the oil market, I have discussed many times the continuation of the bullish drive we have seen since 2001, and if you step back a little further you will see that the last significant bear market low was in 1998 at $10.35.  In the time from then to now we have seen oil prices rise over 700% in 8 years and there is not too much from a fundamental or technical perspective that confirms prices returning to more acceptable levels. 

The commodity of oil is influenced by some many factors, from geo political to supply and demand.  The recent rising tensions in the Middle East have sent destabilising shock waves through the market, hence prices move higher on this news.  Coupled with the uncertainty of supply, we are presented with a sensitive market that can jump quickly on any news, be it good or bad.

I certainly do not ignore any fundamental factors when trading oil, but by nature the trades are not long term, so I can rely more heavily on the technicals for the decision making.  One chart that does present some interesting dinner table conversation is Chart 1 below; a quarterly oil chart.  Since the 2001 lows, this market has only had two negative quarters out of the last 19, with the current quarter yet to be confirmed.

Chart 1 – CL-Spot1 Quarterly Bar Chart

click chart for more detail

That alone suggests that the energy market on the whole will continue to become a focus of all that consume products like oil.  Now that we have established that oil can head potentially higher the question might be where to?  The concept that history repeats should be one that is comfortable to you as a Gann trader. For all Gann traders alike, the main way to project price into the future is too see how far the market has travelled in the past.

The next chart on oil is a weekly bar chart and looks at the major pivot points marked 1, 2 and 3.  By measuring the range between 1 and 2 we can add that to point 3. This is price forecasting, not as mystical as it may seem. We are just using previous history as a guide to future prices.  You can see on the chart areas that I have circled, that the pressure points of 75%, 100%, 125% and 150% have proven to be areas of support and resistance.

Chart 2 –CL-Spot1 Weekly Bar Chart

click chart for more detail

Using the more recent run in the market as labelled on the swing chart, we can see that oil is poised at an interesting point; the 50% Danger Zone. Using the Feb low and April high as my reference range; this market has recently crossed the 50% point and has fallen back below in the last two trading sessions.  The price of $76.32 will act as a barometer of pricing. If it can stay below this price, our tendency is resistance and we can suggest short trades may be in order, once the market can comfortably hold above the price of $76.32, we may see a bullish sentiment in play.

Chart 3 – CL-Spot1 Daily Bar Chart

click chart for more detail

Now these levels are guides only, it would be nice if they played properly and used these levels always as support or resistance. Our best efforts as traders is to watch these levels and make appropriate trading decisions based on what we see in front of us. Using this technique of history repeating, we can see that a price of $85.22 could be potential target and that may well be before year end.

When trading a particular market on a regular basis, taking the time to project prices going forward can provide reliable areas to watch for, as you enter or exit trades and add to the overall probabilities of your trading.

Good Trading

Aaron Lynch