Why Oil Will Continue To Head Higher

Four Technical Signs On Oil's Chart That Reveal Its Future

There are four distinct signs that I'm seeing on oil's long-term, weekly chart. Let's take a look at all of them now.

First, we know from Elliott Wave analysis that downtrends unfold in three major waves (a-b-c). We can see from the weekly, 10-year chart below that oil completed this downtrend as it came into 2016 and it confirmed the end of the downtrend by breaking above the red downtrend line in early-2016. So we've begun the next major uptrend, as of early-2016.

Secondly, from latter 2016 to-date, the 50-week moving average has been trending higher. You'll notice that this moving average doesn't change trend directions all that often. And when it does, it tends not to change directions again for a very long time. In other words, the direction that the 50-week moving average is in tends to remain in that direction for a very long time. Since that moving average is trending higher, it will likely remain trending higher for quite some time to come.

The third sign I'm seeing gives us more specifics about how high oil will minimally go. There's an inverse "head and shoulders" pattern on the chart and that pattern has what's called a "minimum price target" associated with it.

On the chart below, I've emphasized the shoulders, head and its neckline. The pattern resembles a person hanging upside down on the monkey bars. It's a bullish pattern which transitions a downtrend into its next uptrend.

The black neckline connects the highs in the pattern. Once this neckline is broken to the upside, the pattern is complete and we have a way to measure the minimum price target. We measure from the bottom of the head straight up from that to the top of the neckline. The neckline at that point was at around $60 per barrel. The bottom of the head went down to $26ish. Therefore, the distance is $34. Add that to the point of the breach of the neckline at $50 per barrel and you get a minimum price target of $84 per barrel. Keep in mind that much of the time, these price targets are surpassed.

So, over time, it would not be unusual to see oil hit the $85 to $90 region. I know that seems like a mile away from where it is right now. And this will certainly take some time. It won't get there overnight. The complete pattern took a few years to form. So it wouldn't be strange to see oil take a year or two (or so) to meet the minimum price target.

And finally, there's yet another bullish chart pattern called the "cup with handle" pattern or also sometimes referred to as the "cup and handle" pattern. It's simply where the pattern looks similar to a coffee cup. It's got a rounded bottom and a higher low after it which is the handle (parallel black lines). Once the top of the handle is breached, the pattern is complete. It's got a minimum price target associated with this pattern as well. It's basically the same as the inverse head and shoulders.

You measure from the lowest dip in the cup up to the top of the cup pattern and project that distance from the breakout of the handle. You end up with a similar price target as the inverse head and shoulders pattern. (Personally, I trust the head and shoulders price target the most since I've seen that pattern on charts more through the years than spotting the more rare, cup with handle pattern).

In addition to these four technical signs, I've drawn the major resistance zone (yellow box) along with its largest downward resistance line (in red). You can see where these price patterns with their price targets would put oil's price right up in the middle of this resistance zone. So these targets for oil are very doable.

It's next "sticking point" of resistance that it will have to overcome is its red, 200-week moving average. Once this has been overcome, we'll likely see oil's ascent pick up speed much more.

Now...with all of this information at hand, we can draw some conclusions:

The person who's strictly a consumer is going to experience more inflation in their life which will lessen their purchasing power as they spend more of their income on fuel costs at the pump. However, one way to counter act that is through owning an oil ETF or oil stocks that will benefit from oil's rise.

Oil rising is one of the biggest contributors to overall inflation. Why? Products are transported from the manufacturer's distribution centers to the stores where you can purchase them. It takes oil and gasoline (which is derived from oil) to get those products there. The higher the price of oil, eventually the manufacturer has to raise the price of the end product to help compensate for their increasing fuel costs. In other words, in the end, the inflation at the wholesale/producer level is eventually passed down to the consumer level.

And as inflation rises, gold benefits since its a great inflation hedge. So gold ETFs will benefit. Additionally, large gold stocks, gold stock ETFs, etc. will also benefit over time.

So there are many things to consider and many ways to take advantage of the rise in oil's price so that it doesn't harm you like it does for the one who's strictly a consumer and not an investor.

God bless!

Thank you Sean, great article. It's helpful to receive some encouragement on oil after that monstrous drop that started around July '14. With a portfolio full of old UWR oil stocks, I'm hanging on to hope...

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You're welcome. It will happen. Aside from that...oil stocks have been some of the few places of value that institutional money can run to and to get a good dividend yield as well. Those that have averaged down on many of them (BP, TOT, CEO, etc.) have done well and others (the more costly deep water drillers, etc.) are now making their turn higher.

Are there other oil stocks/ETF's you would recommend to us/

At this time, the ones we held in UWR are still worth holding. But they're presently too elevated for new purchases.

I'm curious why you say they are too elevated for new purchases when personally I am way down on many of these stocks and they were purchased below recommended levels in UWR portfolio. I'm still new to this type of investing and am having a hard time keeping this portfolio going. Being new to this strategy, I didn't allow enough time for these stocks to rebound (of course they are taking longer than even you expected as I understand it) so now I am having to pick the best stocks to sell due to cash flow issues.

One must use the averaging down piece of the strategy. It's just as important as any other part of the strategy. Paul, holding what you've got and new entries are two different scenarios.

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