Crude Firming At Key Support

12/20/05 02:36:23 PM

by Arthur Hill

After a three-month decline, crude oil reached key support that could make or break the long-term uptrend.

Security: CL.1
Position: Accumulate

The long-term trend is clearly up. The continuous futures contracts for light sweet crude oil surged to new highs in early September, and the current decline remains well above the prior reaction low (May) (Figure 1). In fact, the current decline is finding support right where it should. The trendline extending up from September 2003 and broken resistance converge around 55 and crude oil in this area. This marks the fourth touch for the trendline, and securities often find support near broken resistance.

FIGURE 1: CRUDE CONTINUOUS. The continuous futures for light sweet crude oil surged to new highs in early September.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

In addition to support, the stochastic oscillator became oversold for the second time in the last two years. That's right. The 14-period stochastic oscillator became oversold only two times in the last two years: once in 2004 and once in 2005. That is testament to the strength of the uptrend. The prior oversold reading (<20) occurred in December 2004 and marked an important low. The index moved below 20 in November 2005 and back above 20 in December. This could mark an important low, and we should turn to the price chart for confirmation.

The decline from September to November looks like a falling price channel, and the early December surge briefly broke above this trendline. Crude fell back and is testing support at 55 again. After a three-month decline, an initial failure is common after the first pop. The December reaction high now becomes the key level to watch for signs of a breakout and continuation of the long-term uptrend. Look for a move above 62 for the bullish trigger.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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