In technical analysis,
triangle patterns are like a traffic bottleneck; when 3 lanes of highway are
reduced to 2 and then 1, driving space simply gets pinched down to a trickle.
Relief comes when motorists are able to pass through the constriction and
traffic opens up as everyone stomps on the gas.
The somewhat rare occurrence
of a triangle stock chart pattern can be viewed in a similar manner. In this
case, the bottleneck results from a tightening battle between buyers and
sellers, one that gets so tight that it is almost literally coiled to break
loose. Thus, a triangle forms on the price charts, leading to a technical
condition where something almost has to give. As I began this commentary
yesterday, an un-resolved short-term triangle pattern had formed in the
continuous crude oil contract.
I started to write that under
this scenario, an upside break out would occur at $63.50 and would likely
lead to testing of the bearish resistance line at $66.50, possibly even the
chart high near $70 seen in January. A downside break, on the other hand,
held the potential to really surprise, implying a potential target as low as
$47 per barrel.
By briefly reaching above
$63.50 this morning, however, that triangle has been resolved to the upside,
as can be seen in the Point & Figure chart below:
Source: www.dorseywright.com
A number of technical
challenges remain overhead for oil, so I don't suspect it will be making a
new high on this move. At the same time, quiet though this morning's breakout
was, the chart shouldn't be ignored, and it suggests that oil may once again
make a move toward its highs in the near future.
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