Oil Index Ready To Hit The Resistance?

01/08/10 11:28:23 AM

by Chaitali Mohile

The Amex Oil Index has covered the major distance of its bullish journey. The volatile sessions of the past few months obstructed the rally heading towards long-term resistance. Will the Index hit resistance?

Security: $XOI
Position: N/A

After a double-bottom formation (B1 and B2) on the weekly time frame in Figure 1, the Amex Oil Index ($XOI) formed higher lows. The double-bottom formation is a bullish reversal pattern, indicating a fresh beginning of an upward rally. The pattern is reconfirmed by a declining downtrend from an overheated area of the average directional movement index (ADX) (14) see Figure 1. The descending trend indicator weakened the bearish trend, and as a result, fresh buying pressure increased. Immediately, $XOI moved higher towards the previous high pivot at the 1050 level and retraced back, forming a higher low. The index continued to form the higher lows but could not surge above the resistance of 1050. Thus, a flat resistance line and an ascending support line were formed. This price action formed an ascending triangle, another trend reversal pattern, as seen in Figure 1.

The descending downtrend was the robust confirmation of the ascending triangle as a trend reversal formation. Meanwhile, the relative strength index (RSI) (14) moved vertically upward from an oversold region. The RSI (14) formed a series of higher highs and higher lows, suggesting significant strength in the bullish movement. After entering the bullish zone above 50 levels, the RSI (14) turned sideways, which might have affected the bullish breakout of an ascending triangle. We can see in Figure 1 that the breakout rally could not violate the 100-day moving average (MA) resistance. An evening star candlestick pattern appeared under the new MA resistance. The second bullish candle after the breakout, followed by a doji and a strong bearish candlestick formed an evening star -- a bearish reversal candlestick pattern (see yellow block in Figure 1).

FIGURE 1: $XOI, WEEKLY

Graphic provided by: StockCharts.com.

Generally, the stock or index corrects after an evening star appears on the chart. But $XOI turned sideways under the 100-day MA resistance. The green rectangle in Figure 1 is marked to indicate the volatile consolidation period of the index. The long shadows and the doji candlesticks reflected the volatility during the range-bound sessions. Another reason for the consolidation was the weak ADX (14) and an equal buying-selling pressure indicated by the positive directional index (+DI) and negative directional index (-DI) respectively.

With the support of 50 levels, RSI (14) is ready to surge in an overbought region, that is, above the 60 levels. This signifies that $XOI is likely to breach the 100-day MA resistance. To confirm the breakout, $XOI should close above resistance, and the next week should open at the newly formed 100-day MA support. However, a breakout rally would be only 100 points toward the 200-day MA resistance, but highly important. Although the ADX (14) is still below 15 levels, the improved buying pressure indicated by the positive directional index (+DI) would fuel the fresh breakout rally. Traders should wait for the confirmed breakout signal.

Thus, $XOI is technically ready to undergo a small breakout rally after the long volatile consolidation period.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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