Channeling Crude Oil Shows $60, Or An 8% Correction Possible

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWT
by: Chris B Murphy

Summary

Crude oil remains in a bullish channel despite the sideways price action for the past 10 weeks.

By creating a channel on our charts, we can see the support and resistance levels more clearly and help us profit better and manage our risk more effectively.

A crude oil weekly close below $51 or above $54 increases the likelihood of a move to the floor or ceiling of the channel.

Crude oil has been trading in a bullish channel while making higher lows and higher highs. The bullish move is due to several factors, including OPEC members making good on their promise to cut production so far. Also adding to the bid in oil is the expectation that U.S. shale production increases won't kick in until the second half of the year. Healthy demand has also prevented oil from retracing significantly, as shown below by the International Energy Agency.

As per the IEA:

Global oil supplies plunged nearly 1.5 mb/d in January, with both OPEC and non-OPEC countries producing less. At 96.4 mb/d, world oil production stood 730 kb/d below a year ago, with OPEC posting its first year-on-year (y-o-y) decline since early 2015.

Channeling Crude Oil

The bullish trend remains intact with higher highs and higher lows. However, for the past 10 weeks, crude oil has traded roughly in a $2 range.

The bullish channel can be created by "cloning" the trendline that connects the lows of the rally and moving the new cloned trendline to match the highs of the rally (see chart below):

By cloning the trendline, we maintain the angle of the lower channel trendline and the angle of price action. And when we apply the cloned trendline (which has the same slope) to the highs of the price action, the identical sloping lines create the channel. With the creation of the channel, we now have better insight as to where crude might face resistance or support.

As we can see from the chart, crude has had multiple hits on the weekly chart to the topside of the channel (orange line) with one break of the channel high. The channel also shows us how much oil can retrace while remaining in the bullish channel or uptrend.

Charting possible targets of resistance and support:

As we can see from the chart, crude oil could retrace 8% to the floor of the channel while remaining in the bullish trend. A break of $51 to the downside and a weekly close would fill the gaps of all the candle wicks from the past 10 weeks. A weekly close below $51 increases the chances of a deeper correction to channel support. On the topside, a break of $54 and a weekly close above it would be a bullish signal. A weekly close above $54, would surpass the closing prices of the candles to the left for the past 10 weeks.

Of course, crude doesn't move because of a line on a chart. There are a myriad of factors affecting crude such as the level of OPEC production cuts, supply and demand, and inventory levels.

How creating a channel can make you more profitable

We all want to time the market perfectly. Ideally, we want to get in at the bottom of a young move by going long and pull out of the market at the top when price is exhausted. Creating a channel can help us identify the tops (resistance) and bottoms (support) of a trend move.

By creating a channel, we can visualize the angle of which the market is trading, giving us support and resistance levels during a trend move. The top and bottom levels of the channel can help us place our stops and take-profit orders and manage our risk more effectively.

Creating a channel can also help us avoid a bad trade. If, for example, crude is trading near the top of the channel, we can wait for a pullback before going long. Creating a channel helps us avoid buying at resistance and selling at support. Sometimes no trade is the best trade.

For those invested in crude, take a look at ETFs like the United States Oil ETF (NYSEARCA:USO). Charting the possible moves of a channel before the next move happens allows us to better prepare for when crude oil breaks out of this 10-week range-bound market.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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