Financial Advisor

It's All In the Charts: Outlook Improves for Crude Oil

There is an old saying within technical analysis: "It is all in the charts."
The idea behind that old market axiom is that all known fundamental factors--whether it be supply and demand data, weather or potential supply disruption issues--are all factored into price at this exact moment in time.
With instantaneous information flow in this digital age, traders around the globe are constantly pricing and re-pricing markets on a second-by-second basis. Often times the individual retail trader simply can't compete against hedge funds or major institutional traders with their teams of research, news and data.
But, the individual trader can always rely on the chart.

CRUDE CLOSE-UP
With that in mind, let's take a look at the July New York light crude oil futures contract. While many individual traders simply can't keep track of the constant flow of Department of Energy (DOE) or American Petroleum Institute (API) figures, traders can study the chart.

WEEKLY PICTURE
Figure 1, courtesy of E-Signal, reveals a weekly continuation chart of nearby crude oil futures. Longer-term trend analysis reveals that the dominant or primary trend off the January 2009 low is up. From January 2009 into the May 2010 high, nearby crude oil rallied from $32.70 per barrel to $87.15 per barrel.
Other bullish technical factors from the weekly chart include a bullish turn in slow stochastics from oversold territory and a successful test and bounce from initial Fibonacci retracement support.

FIBONACCI SUPPORT HELD
The sell-off which began in early May, held initial 38.2 percent Fibonacci support, from the rally off the January 2009 lows. The market has bounced from that support zone, which reveals that the May pullback was merely corrective to the overall uptrend.

KEY LINE IN THE SAND
However the bulls are now facing a key challenge on the upside, which is the 200-period moving average also shown on Figure 1.
Technical traders are well aware that the 200-day moving average is often seen as a gauge or proxy of the longer-term trend. For several months, the crude oil market shifted into an intermediate term sideways range, dipping back and forth below and above that closely watched moving average.
As of this writing June 14, the 200-week moving average comes in at $76.66 per barrel. Gains above that on the weekly chart would be considered a bullish signal, if that were to occur near term.

DAILY TIMEFRAME
Shifting down to the daily July crude oil chart, (not shown here), one sees a successful short-term bottom formation by the bulls off the May 25 low.

NEW UPTREND
Successful technical traders often say it is best to "keep it simple." In this era of technology dominated trading, individuals can often overwhelm themselves and their trading by attempting to study, monitor and analyze too many different technical indicators.
Find a couple of technical indicators that you like, and that you understand and build your trading signals and system around them.
Generally, trend is a key starting point. An uptrend is defined as a series of higher highs and higher low. The daily crude chart show a new near term technical uptrend has formed off the late May low.

MULTIPLE TIMEFRAMES
That leaves the longer-term trend as up, the intermediate term trend sideways and the short-term trend up.
On the daily chart, the 200-day moving average comes in around $79.60 currently. If the bulls can blast through that level in the days ahead, it would unleash a fresh up leg in the crude oil market.

BOTTOM LINE
The bottom line is that the technical picture is improving for crude oil. No significant chart damage occurred on the May sell-off, which was seen to be corrective to the longer-term uptrend. A fresh uptrend has started on the daily timeframe, with the market climbing higher amid a series of higher highs and higher lows. Swing traders have switched from selling rallies to buying dips.
A key line in the sand lies ahead. A move through $79.00/80.00 would unleash a fresh rally wave targeting a retest of the May 3 peak at $89.77. Fill up your tanks now.

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