Technical Analysis hints at Higher Oil Prices

Jan 2, 2008: 6:44 PM CST

While nothing is certain in the markets, if we use basic principles of technical analysis, it would appear that oil prices are expected to continue their uptrend higher, and there is no resistance in sight, but there are clear support levels beneath.

First and foremost, trends – once established – have greater odds of continuation than of reversal.

Trends can be identified by a number of methods, the simplest being the ‘price method’ or ‘moving average orientation’ method. Both methods confirm a clear uptrend in crude oil prices.

Daily Crude Oil:

Price is in a clear uptrend, with higher highs and higher lows.

The moving averages are in the most bullish pattern possible, with the 20 (green) above the 50 (blue) which is also a distance away from the 200 (red). We can expect prices to continue their ascent until this condition changes.

Also, a recent sell divergence has completed and been resolved. I highlighted the sell divergence with maroon lines.

Also, I have circled key points in price where the convergence of the 20 and 50 period moving averages has served as key support levels. We can expect (the odds favor) this behavior to continue into the near future.

Price has already taken out key resistance at $98 and of course psychological resistance at $100.

Price may not swing completely through $100 at the moment, but may come back and retest the $94 level or thereabouts to gather steam for a higher move. Of course, when the $100 zone is clearly (definitively) breached, we can expect higher prices that will take the contract upwards of $110 and beyond.

Briefly, let’s look at the weekly chart:

The same pattern of higher highs and higher lows, as well as the ‘perfect’ orientation for the moving averages is clear on the weekly chart too, which holds greater sway over daily moves.

The structure of the longer term chart is clearly up, and the odds favor higher prices are still yet to come. From this analysis, there is no way to know exactly how far price will go or when it will reverse, but it’s often best to trade with the trend than bet against it.

Remember that trends swing back and forth as price tests and retests known boundaries and reference points. No trend goes straight up without pauses. However, we can expect higher prices to occur in uptrends, and we see little evidence to the contrary in the current technical picture (chart) of crude oil futures.

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