Crude Oil Pace Problem

The past year has seen some incredible trends. Most notable is the rise to historic levels in equity indexes. Another more recent rally began in June and has yet to recede. Crude oil bottomed out in early 2016 and spent the next 18 months or so in a rather tight range. Nearly all the trade during that consolidation period occurred between $45 and $60. In mid-December oil began to rise from $56 and penetrated the upper band of the long-term range on the last day of 2017. It has been on a steady rise for a month straight.

Using a 7-month sample as a benchmark, the average month range for oil spans about $5.50. The range over the past month is almost $9.00. The range since mid-December is closer to the length of an average quarter, which is approximately $10.50. A vertical move of this magnitude is common after a long-term consolidation phase. Think of it as pent-up energy, also known as the horizontal dimension or time at price. Trends often begin violently when a long-term barrier is busted and the pent-up energy is released.

The oil futures chart below shows the price action since the rally began. It is a 30-minute bar chart with color coded daily value areas. Value areas are the shaded boxes that cover one standard deviation of the volume (approximately 70%) during regular trading hours or the most liquid time of day. Markets tend to find support at the bottom of value areas during a rally, and the top of value areas frequently provide resistance in a declining market. The brackets in the graph display average day and week ranges. These are used to tell if the pace of a move is too fast (overbought/oversold).

The point is that the speed of this rally is quick. Thus, odds favor a couple of weeks of choppy trendless trade while the pace issue dissipates. The recent high volume or fair price is about $63.50, and it should have some gravitational pull. If CLG8 gets about 75% of an average week range above this price expect resistance, and if it gets about $2.00 below it expect support. 

John Seguin, Market Taker Mentoring

Trader Education