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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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The Magic Number For Oil Bulls Remains In Sight

Oil Rigs

Zev Spiro, chief market technician of Orips Research is forecasting oil to reach above $70 a barrel in the near future, as oil’s weekly charts show a bullish “inverse head and shoulders” pattern.

"This large complex bottoming pattern could trigger a confirmed move above the horizontal neckline in the $50-$51 area," he said Thursday on CNBC's Futures Now. "[This] would signal a primary uptrend with a minimum expected price objective in the $73 to $76 area."

In order for any research to be useful, it should be studied in all time frames—the long-term, the medium-term and the short-term. Usually, when all the three time frames are in sync, the chartists can forecast the future prices with a greater degree of confidence. Let’s examine oil in all the time frames and try to see under what conditions is $73-76 a barrel, a reality.

Long-term charts

(Click to enlarge)

The monthly chart of oil shows that after the steep fall of 2008-09, prices could only retrace to just above the 61.8 percent Fibonacci retracement levels, as shown in the chart above. Any attempt to push prices higher, above this level, was met with significant selling pressure, which pushed prices back below the resistance level.

After four failed breakout attempts, oil prices began their slide in mid-2014.

(Click to enlarge)

Oil not only retraced the complete upmove that started in 2009, it overshot the level on the way down, dropping below the financial crisis levels, hitting multi-year lows in February of this year.

However, prices could not sustain below the lows and quickly shot back up, which is a positive sign. It shows that the markets did not accept these low levels, so prices shot back up immediately—and prices continue to remain in a downtrend on the monthly charts. Related: Forget Driverless Cars – Driverless Air Taxis Are The Future

Now, let’s look at the medium-term time frame to check whether the prices are likely to rise further from these levels or fall back down once again.

Weekly charts

(Click to enlarge)

Oil, which is currently in a pullback, retracing the fall, has not even reached the 38.2 percent retracement levels. It is currently oscillating close to the 23.6 percent retracement levels, which confirms that oil continues to face selling pressure at higher levels.

The inverted head and shoulders pattern

(Click to enlarge)

The pattern, as shown above, is usually considered a good bottoming pattern, having a decent success ratio. However, in order for the pattern to complete, prices should breakout of the $51 levels.

If prices don’t breakout quickly and continue to drag, or if prices remain in a range for a longer duration, it will result in an extended right shoulder, which tends to perform worse, according to thepatternsite of famed chartist Thomas Bulkowski.

If prices were to breakout quickly above the $51 levels in the next few weeks, we can expect a pattern target of around $75 a barrel, but if prices again slide towards the right shoulder and meander, the pattern will lose its strength over time.

Let’s look at the short-term to see if we can expect a breakout soon.

Daily charts

(Click to enlarge)

Oil faced considerable resistance near the $50 a barrel mark. Even after spending considerable time near the level, it could not cross above it, with the current rally in crude fizzling out at $49.09 levels. The level from $49 to $51 a barrel is the real litmus test for the bulls. If they can push prices above the resistance level and sustain it, then higher prices are in the offing. Related: Oil Floods The Streets Of Iraqi Town After ISIS Opens Tap

On the other hand, if prices again return from the current levels and drop below the trendline, as shown in the chart, chances are that oil will be range bound for a while. If that happens, then the inverted head and shoulders pattern loses its strength.

Conclusion

1. The inverted head and shoulders pattern is complete only after crude oil prices breakout above the $51 a barrel mark.

2. A rally above $51 a barrel level gives oil a pattern target of around $75 a barrel.

3. If crude oil prices remain range bound, thereby stretching the right shoulder, it reduces the reliability of the pattern to reach its target objective.

4. If prices break below the $39 levels, then it will change the structure of the whole pattern.

Rakesh Upadhyay for Oilprice.com

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  • Justin on August 30 2016 said:
    Not sure how Chartists can predict things like refiners switching gasoline blends

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