miroslava.micunkova's picture

How far can oil fall after a four year+ support-line has been breached?

Since retracing between 61.8-76.4% (147.90-35.13 retreat) of the financial crisis plunge at 115.27 on 02 May 2011, oil has been moving within a major trading range. Seasonal surges and declines have been appearing fairly regularly, following approximately a 4-month cycle from the peak to through. The actual rally peaks reached, were however deteriorating over time, forming a series of declining highs.

Taking the bearish edge off such an indication were the rising lows on the opposite, when connected together, forming a 4 year+ slightly upwards sloping support line. On a large scale such a formation may be classified as a symmetrical triangle, usually suggesting indecision of the next market direction.

Since late June 2012 some more clues started to surface as a multi-month head & shoulders pattern was traced out. Completion was signaled by a break below the USD 84.05-91.24 neck-line in early August at USD 95-97.00 pointing to a minimum downside target of USD ~75.00.

As the price approached the 4 year+ uptrend-line at USD 88 and neared the end of a 4-month cycle, a short-term recovery rally emerged.  Due to the downward pressure from the completed H & S pattern, this could not sustain and finally the 4 year+ support line gave way. We assume that this break may possibly signal a completion of a multi-year symmetrical triangle suggesting a major trend change of the future oil price. The long-term target (6-month+ horizon) would point towards the USD 55.00 area. For the time being we are looking at USD 67.00-75.00 (May 2010 low - measured target) as the nearest targets with an initial bounce toping out ideally by the USD 88.00-90.00 former support.