Crude Oil Trying To Overcome Key Resistance

10/06/04 09:45:09 AM

by Kevin Hopson

Will a potentially bullish consolidation pattern finally lead to a break of key resistance?

Security: $WTIC
Position: Hold

In case you have been living on another planet, crude oil prices have been on the rise for the past 12 months. More specifically, prices have nearly doubled since September 2003. Despite this commodity's performance over the last year, crude oil may have even higher to go. However, key resistance is currently standing in the way of this. For example, if you look at the year-to-date chart for the continuous futures contract, you will notice that the green median line and the top black parallel line have both converged around the $49.00 level. As a result, this price level has turned back prices in recent days.

If you turn your attention to the long-term chart, you will see that crude oil prices have been contained within the lower half of the reverse pitchfork configuration since September 2003. Even though crude oil has violated the median line (resistance) and the bottom parallel line (support) on occasion, prices -- for the most part -- have traded within this rising channel formation. Because the top channel line (or median line) comes into play around $50.00, the continuous futures contract faces key resistance in the $49.00 to $50.00 range.

Figure 2: Crude Oil, Continuous Contract

Graphic provided by: StockCharts.com.

However, if you take a look at the third and final chart (the point & figure chart), you will notice a potentially bullish setup in the November 2004 futures contract. More specifically, the chart shows a possible bullish triangle (or pennant) forming. (To learn more about point-and-figure charting, visit http://www.dorseywright.com.) The reason I say "bullish" is because symmetrical triangles tend to be continuation patterns and the prior move was up. If crude oil can overcome key resistance around the $50.00 level, breaking out of its current triangle formation in the process, prices should see another significant rally. In the meantime, I would continue to hold, as the long-term uptrend remains intact.

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.