Crude Oil's Bullish Consolidation Pattern

02/26/04 01:00:38 PM

by Kevin Hopson

Crude oil prices have settled into a bullish trading range since early January, indicating the potential for higher prices ahead.

Security: $WTIC
Position: N/A

Even if you do not follow the crude oil market, you are likely aware that prices have moved higher for several months now, whether it be through rising gasoline prices at the pump or continued media debate on the subject. With crude oil prices currently hovering around 11-month highs, per the continuous futures contract, many people are now wondering just how high prices will go. If the charts are any indication, the answer is much higher.

Looking at a one-year chart for the light crude oil continuous futures contract, you will notice that prices have been in a steady uptrend since September of 2003. This is best illustrated by the lower channel of the green pitchfork, which has contained prices the last several months. Notice that the bottom green parallel line (last September's uptrend line) has remained intact. This means that the five-month uptrend has shown no signs of breaking down.

Graphic provided by: Stockcharts.com.

However, since the early part of this year, prices have been consolidating in a trading range between the $32.50 and $35.00 levels, as seen by the red and black dotted lines. Notice how $32.50, which once acted as significant resistance, is now acting as support (or the bottom of the trading range). Since trading ranges tend to act as continuation patterns and the trend is positive, there is a good possibility that prices will break to the upside. If so, crude oil prices could trade well above $40.00.

More specifically, crude oil prices could make their way up to the $42.50 to $45.00 range in the long-term. I calculated this by taking the number of times that prices tested the upper channel line in alternate sequence (4), multiplying it by the width of the trading range ($35.00 - $32.50 = $2.50) and then adding this number (4 x $2.50 = $10.00) to the bottom ($32.50 + $10.00 = $42.50) and top ($35.00 + $10.00 = $45.00) channel lines. This calculation assumes that prices will not test the bottom channel line again before breaking out. In any event, keep an eye on crude oil prices, as a significant break of resistance around the $35.00 level could signal much higher prices ahead.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.