Since last writing on the crude oil market in the short-term, the price of oil has risen to test the top of that uptrend channel as predicted and is being guided by a bullish parabolic bowl pattern in its daily chart (shown previously and updated below).
In the previous commentary we stated, "Now that crude has once again found support from this channel its prevailing upside momentum is once again coming to the rescue to lift the price higher...A near-term advance back up to the $50 level or higher should follow." The bowl acted as a support and momentum guide by pushing the price of crude up about $4/barrel as it hit a new yearly high at just under the $52/barrel mark on Tuesday, Feb. 22.
As we've talked about before, crude oil tends to travel along a series of concentric curves in the form of a parabolic arc. These parabolic curves may take the form of bowls or domes, and at any given time a series of interlocking bowls and domes are present the chart (largely invisible to the naked eye without the aid of drawing tools). The preceding mini-decline in the price of crude was guided by a large parabolic dome, which was broken to the upside on Thursday, Feb. 10 (mentioned in the previous commentary).
Since that time we've followed the progress of a short-term bowl that was the dominant market curve in late December, which kept the late 2004 decline in the oil price from going straight down in rapid fashion. This particular bowl is still very much alive and has not only kept the oil price afloat above the pivotal $40 benchmark area in recent months but this bowl is dominant once again after the short-term dome was been broken earlier this month.
Now that oil has reached our conservative upside target and is testing the upper boundary of that short-term trend channel, what's next for the price of crude? The latest uptrend channel shows further potential upside to the $53.00 area. At that point some strong resistance begins and by then crude will have over-extended from its parabolic bowl and will probably be in need of a pullback and further consolidation. I'm convinced the Fed doesn't want the price of oil to explode right now as it did last year and the powers that be will likely try their best to keep the oil price contained below last year's high for as long as they can before the underlying forces of demand have their way.
In headline news, we find the financial press releasing a recent spate of somewhat bearish news headlines about the oil market and oil companies in particular. Some trading magazines came out with a bearish forecast on the oil market based, among other things, on a supposedly bearish "head-and-shoulders" pattern in the crude oil chart. Of course when virtually everyone recognizes such a pattern, the pattern loses all its validity (which is why technicians should stick to price channel and parabolic analysis among other tools and should not assign too much weight to price patterns alone).
From a contrarian standpoint, of course, this provided the perfect psychological backdrop for the recent rally. Focus has also been on oil companies encountering difficulties finding new reserves and the heavy expenses they will encounter in finding them. This provided the backdrop to the terrific action of late in the Amex Oil Index (XOI), a subject we will touch on in our next installment.