The left shoulder of the pattern is created by the lows of January and March 2015 (Area A.) This double dip behavior to create an inverted head and shoulder pattern is unusual.
The left side base of the neck is created by the rally and consolidation in May to July 2015 (Area B.) This consolidation developed around the $58 support and resistance level.
The head of the pattern is created in the week of August 29 with the dip to $38.24 and the quick rebound (Area C.) This has the behavior of a exhaustion sell-off.
The key feature is that this demonstrates the future development of the current rally.
Three future features are now needed to confirm the inverted head and shoulder pattern. They are shown with the thick black lines on the chart. The first feature is a continuation of the current rally with a move above $48 towards historical resistance near $58 (Area D.)
The second feature is a rally collapse and a re-test of the $48 area as a support (Area E.)
The third feature completes and confirms the head and shoulder pattern; another rally away from support near $48 and a move above resistance near $58.
The neckline of the pattern is between points B and D. When point D is confirmed then the depth of the pattern is measured and projected upwards to set the first uptrend breakout targets. Traders will watch for future confirmation of the pattern because this will be a signal to go long on oil.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available atwww.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.
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