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RECTANGLES


December Crude Oil is Stuck in a Trading Range

11/04/02 11:39:31 AM
by Kevin Hopson

December crude oil has been stuck in a week-long trading range since selling off late last month. A break out of this trading range will determine whether or not prices continue their downward trend.

Security:   CLZ2
Position:   Hold

December crude oil (CLZ2) has been stuck in a week-long trading range since selling off late last month. More specifically, the contract has been trading between the $26.50 (support) and $27.50 (resistance) levels. As you can see in the chart, the $26.50 level acted as prior resistance back in August. Since this ended up being a significant breakout point for crude oil prices, traders who failed to get in at that time are now buying (offering support) on pull backs to this level. Additionally, the contract's 150-day moving average ($26.78) has been acting as a key support level on a closing price basis.

On the flip side, the $27.50 level acted as prior support last month. Not only was this the site of a spread double bottom formation dating back to September's low, but it was also site of the 61.8 percent retracement level from August's low to September's high. Since this was a key area of support for crude oil prices, traders who initially bought here are now selling (causing resistance) as prices continue to approach this level. As a result, December crude oil has formed a bearish rectangle over the past week.

Graphic provided by: SuperCharts.
 
Though the terms trading range, congestion area and rectangle formation are essentially different titles for the same pattern, a bearish rectangle better describes the current situation, the reason being that the trend leading up to the recent consolidation period was negative. Since trading ranges (or rectangle formations) tend to be continuation patterns, the logical prediction would be for crude oil prices to break to the downside and continue lower. This is why I made a reference to the bearish triangle formation.

However, a continuation of the recent trend does not always occur in this situation. That is why it is important to keep an eye on the potential breakout points. For example, if December crude oil can move above broken support in the $27.50 to $27.70 range, the top of the trading range will be broken and a break to the upside could result. On the other hand, if December crude oil breaches support at the $26.50 level (site of last month's low and August's breakout point), the bottom of the trading range will be broken and a further move to the downside could result.



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.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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Date: 11/06/02Rank: 4Comment: 
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