Charts Suggest Crude Oil's Next Move

02/27/2012 10:35 am EST

Focus: COMMODITIES

Corey Rosenbloom

Founder and President, Afraid to Trade

With crude oil entering a zone where no immediate overhead resistance, price seems likely to drift higher—though not without potential retracementstowards the closest resistance level around $115.

Though it’s been mentioned frequently on the news, the recent crude oil price breakthrough has been impressive on the charts as well.

Let’s take a look at the current structure of crude oil and pay special attention to the breakout from consolidation/resistance, as well as the current “open air” pocket to watch.

Here’s the daily chart structure:

chart
Click to Enlarge

I wanted to highlight the main points of the chart, including two trades that developed for aggressive traders.

First, oil struggled against the $103 overhead resistance level and formed a clear sideways trading range (rectangle price pattern) between $95.00 and $102.50 as labeled above.

This allowed an opportunity to play a “support bounce” (including the 200-day SMA) from $95.00 as February began.

The initial target for a range play off support is always the top of the range or resistance—in this case near $102.50.

When price broke firmly above the $102.50 line and began trading even higher than that  this week— particularly on the break and close bar on February 17—it triggered a breakout trade.

That breakout trade is still in motion, though there’s no clean/easy entry after the initial breakout (per breakout trading logic).

Here’s the pure price chart to highlight the current “open air" pocket:

chart
Click to Enlarge

The $102.50/$103.00 area was important as it provided prior areas of resistance from mid-2011 to present—particularly from May/June.

The firm breakout and continuation move higher this week officially enters the “pocket” of open air between $105 and $115—there’s no obvious price resistance between those zones given the sharp drop in May.

While price may not continue straight up/directly higher without some sort of retracement, price may ultimately continue its higher movement towards the prior reversal high at $115.

This is the logic of “open air”—looking backwards on a chart to see any obvious price targets or levels. An absence of these barriers suggests continued movement through the air pocket.

For those wishing to look inside the daily chart, here is the hourly chart structure:

chart
Click to Enlarge

I wanted to make a quick note from an educational standpoint, particularly with regard to higher time frames.

Note the $95 confluence support area on the daily chart and now view the structure as it appeared at the beginning of February.

The hourly chart showed a downtrend developing multiple positive momentum divergences into the daily chart’s confluence support at $95.00.

This helped confirm the bigger picture retracement or range bounce play mentioned above.

Eventually, price broke through the falling dourly trend line and developed a kick-off surge in momentum—an early chart signal of potential trend reversal.

This provides a good example of one of my favorite complex trades: higher time frame support plus lower time frame positive divergences/kick-off signal.

Eventually, the breakout trade developed from this week’s breakthrough beyond $104.00 and $105.00, placing us in the current open air zone.

For now, let’s watch price in the context of the daily chart’s support level near $103 (if you’re bullish, you don’t want to see price return back under $103 anytime soon) and the current impulse/trend move making its way through “open air,” perhaps all the way back to $115.00 as a potential target.

By Corey Rosenbloom, CMT, trader and blogger, AfraidToTrade.com

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