Let’s take a big picture look at the oil market for a moment. Below is the monthly chart of the front month futures contract. Since prices mailed their failed attempt to get back above 120 again in 2011, they have essentially gone nowhere. The market has been increasingly narrow in either side of about $100 for just about three years now. That has led the Bollinger Bands to become very narrow – even more narrow than they were before the Financial Crisis. Narrow Bands are generally an indication of a market getting ready to make a meaningful directional move.
Of course I’m not suggesting we start looking for another round of massive price moves and extreme volatility like we say in 2008 and 2009. Rather I’m suggesting it’s time for us to start looking for a range break to unfold in the long-term time horizon.
We may have to wait a while, though.
The weekly chart below shows us that range entrenchment is a major feature in that time frame. We can see a similar narrow Bollinger Band situation which has developed there, also suggesting that the market is poised to get more interesting in the weeks to come.
The issue, though, is any sort of volatility expansion or trend move from here would only move oil toward the edge of its long-term range, not beyond it. There would still be a significant hurdle to overcome to get into new territory and start that bigger picture move. As such, what we need to see in the weekly timeframe is a two-stage trend move – one to get to the range limits, then a second one to push beyond.
Naturally, the longer a range is in force, the harder it is to break. At the same time, however, once the range does break, things can get really exciting very quickly.
As things stand, probably the best plan of action for market participants for now is to expect more of the general same in the intermediate term. For those with a longer-term aspect to their work, however, now may be the time to start planning for the eventual pattern change.