Oil prices set for a breakout, but which way will they go?
Oil reached a high of $US140 a barrel in June 2008, just before the global financial crisis really hit home with the collapse of Lehman Brothers. Then it fell for seven straight months to reach lows close to $US40 a barrel, under the influence of the intensifying recession and fears that China's economy might collapse.
But the situation turned around strongly, with professional traders pushing the price back up to resistance levels of about $US114 a barrel in April 2011. Since then, the price has been oscillating between narrowing trend lines, indicating that oil is set for a breakout.
Looking to find which direction, investors could use several charting tools that measure momentum and are widely available, such as the stochastic oscillator.
While such tools can be useful, Umansky warns they should be used with great caution as they measure only past performance.
The tightening of the price oscillation indicates that any breakout is likely to be strong and the chart could be described as being in a very long-term congestion pattern. Indeed, the price following the breakout could test either its highs or lows on the chart, he says.
With that in mind, he says, wise traders will be looking for a breakout in either direction while protecting their position with stop losses just below the trend line on the opposing side of the breakout. However, in such situations it pays to be nimble and investors need to keep their eyes out for false breakouts that could be quickly reversed.
Where a position is taken in what turns out to be a false breakout, then the position should be reversed if the oil price re-enters the confines of the trend lines.
This column is not investment advice. rodmyr@gmail.com
Frequently Asked Questions about this Article…
Technical analyst Mark Umansky shows monthly oil futures have been trading inside ever‑narrowing trend lines since January 2009. That tightening, or congestion pattern, suggests the next move is likely to be a strong breakout — either up toward previous highs or down toward prior lows.
A narrowing band (congestion pattern) means price swings are getting smaller as buyers and sellers reach equilibrium. Historically, when that pattern resolves it often leads to a decisive, stronger move and higher volatility as the price breaks out of the range.
Momentum tools such as the stochastic oscillator can help gauge the strength and direction of recent price moves. The article notes these indicators are widely available, but also warns they measure only past performance and should be used cautiously alongside other signals.
The article cites oil reaching about US$140 a barrel in June 2008, falling to around US$40 during the 2008–2009 downturn, and rising back toward resistance near US$114 a barrel in April 2011 — useful reference points when thinking about potential breakout targets.
According to the article, wise traders look for breakouts in either direction while protecting positions with stop losses placed just below the trend line on the opposite side of the breakout. Being nimble and prepared to act quickly is also recommended.
A false breakout occurs when the price briefly moves outside the trend lines but then reverses back into the range. The article advises reversing the position if the oil price re‑enters the confines of the trend lines to limit losses from false moves.
No. The article emphasizes caution: technical indicators like momentum oscillators measure past performance only. They can be useful, but should be combined with risk management (stops, position sizing) and awareness of false breakouts.
No. The article explicitly states it is not investment advice. It offers commentary on chart patterns and risk management ideas from Mark Umansky, but investors should do their own research or consult a licensed adviser before acting.
Call 1300 880 160
Start a chat
Schedule a call
