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An old proverb says that in the land of the blind the one eyed person rules. These days the pundits on many talking head TV shows go on and on about crude, but almost never from a technical viewpoint. This is primarily because the average commentator knows very little about technical analysis and viewers less. Comments about moving averages and wave analysis would be foreign to the majority. Nevertheless technical analysis is a very valuable tool in understanding market behavior. It's based on the assumption that the charts tell us everything the market knows about itself. Thus we will take a look at the technicals, without regard to talking head chitchat or fundamental speculation, to see what the charts are telling us about crude. Our analysis focuses on the perpetual and August NYMEX WTI (CL) charts. Even if August expires before the forecasted scenario plays out, the forecast is still valid because even contracts a year out highly correlate with nearby months. For example, the correlation between the first and twelfth nearby, calculated over the life of the contract, is 0.992. What the charts are saying as of this writing (close of business on July 7) is that prices could correct to about $127 near term and have at least a 60% chance of rising to $200. Our calculations show that once the market overcomes a price of about $148, a run of another $11 should follow very quickly. There is intermediate resistance at about $178, but again, odds are, once $148 is overcome, at least 60% for $200. Specifically, odds for $200 crude oil are 63% at $148 and then rise to 71% upon a close over $158. For those who would like an explanation, a brief overview of our wave analysis - the main tool Kase uses in forecasting - may be helpful. Our wave analysis indicates that the first wave cycle up for which targets have not yet been met is, $57.61 - 96.44 - 84.33. Having exceeded $138, which was the 1.38 target, the next objective is just below $148 at $147.2 - the 1.62 target. CLQ08 Waves Up from $57.61 If you cannot view the CLQ08 Waves Up chart, go here.

The next identifiable cycle of importance is $57.61 - 135.49 - 122.05, which if followed by an equal wave, would hit a target of $200. For this wave, $179 is a minor target as well. Whenever targets appear early in the wave structure, like these, and are confirmed later as well, then they increase dramatically in importance. The next two waves project to $159 and then $200 as the "extended" target, which uses the multiplier 2*1.38. Without going into detail and showing all the wave cycles, it is connections like this one, where two consecutive wave cycles project to highly confluent (frequently occurring) targets using the same multiplier. This is called in Kase jargon, a diagonal cascade. If you cannot view the example chart, go here. Other similar cascades are found among the wave cycles, such as the one below and to the left, or include combinations of vertical, horizontal as well as diagonal cascades connecting the major targets. It is the connections and their relative prevalence, which give clues as to the odds of continuations higher. If you cannot view the example charts, go here. Another interesting pattern involves equal waves. The entire wave structure, up from $57.61 doesn't have many wave cycles that match standard proportions. While this is not unusual for larger scale cycles, there is a set of equal waves within the cycle $67.85 - 135.49 - 122.05. This means that equal wave projections are important as well as targets projected by wave cycles having the form x - 135.49 - 122.05 are also important. Three wave cycles with this form, as shown below, form a diagonal, equal to target calculation cascade. For the last cycle listed, there is also a horizontal connection from $148 to $159. If you cannot view the example chart, go here. So, these are some of the wave analysis that underlie our thinking and which we use regularly in our weekly forecasts. Given that the $145.85 was a new high, some calculations relating to reversals, such as retracements, moving averages or candlestick completions, just aren't pertinent to projecting higher levels because they are all below the market, not above. The only other elements that might be helpful are geometric patterns - but there are none that are applicable right now - and gap projections. Gaps, depending on when they occur, can be defined as "measuring gaps" and may be used to estimate future market prices until they are filled. A gap took place during regular trading hours on the perpetual first nearby chart on June 6, 2008. This gap first projected to $138, which has now been exceeded, and now projects to $148 (from the $110.3 swing low) and $159 (from the $98.7 swing low). An earlier gap from April 14 also projects to $159. The gap projections act as confirmation for the wave projections and appear to confirm that once $148 is met, a jump to $159 could take place, as it is called for by both gaps. Perpetual Gaps If you cannot view the Perpetual Gaps chart, go here.

Now, let's look at support and where the support targets are. Before evaluating the wave cycles and targets, we will look at three elements that are fairly well known to most readers of technical commentaries. These are candlesticks, patterns and momentum. On close of business last week, July 4, there was an evening star setup with two stars on the August CL contract, CLQ08, as well as completed divergences on both the Kase PeakOscillator and RSI14. With Monday's action (July 7) the candlestick pattern and divergences completed. Both of these signals are bearish, and also reinforce each other when they appear together. CLQ08 Daily Evening Star and Completed Divergence If you cannot view the Daily and Divergence chart, go here. In addition, on the weekly chart there was a pattern similar to an evening star setup (last week's was a bit large to be a textbook star), and if the today's action defines this week's, then the divergence and candlestick pattern will be complete. This is not only also bearish, but in addition, the higher, weekly timeframe adds to the negativity, so this could foreshadow a more significant decline. CLQ08 Weekly Candlesticks If you cannot view the Weekly chart, go here. One of the key measures used to evaluate the extent of reversals are standard deviations of range. The methodology is called the Kase DevStop system where reversals equal to the average two-day range, and then one, 2.2 and 3.6 standard deviations of the two-day range are quantified. Simply put, given either a divergence or a reversal of a particular magnitude, the DevStops estimate how far the market will move. During the course of the writing of this analysis, prices have dropped to $135.14, which had, according to the DevStops, an 85% chance of being met. Now that it has been hit, the odds of declining to lower prices have increased. Specifically odds of key levels are: $133/85%, $131/73%, $127.7/60% and $118.3/33%. Keep in mind that these are purely statistical odds, which are increased based on wave analysis. The analysis shows a potential ABC pattern, where Wave A is $145.85 - 139.50 - 143.44 and Wave C is still unfolding. The equal to target for this pattern was $137.1, and the 1.38 projection around $135, which could hold, but odds if this target is met and exceeded, the next objective is the 1.62 target at $133, as shown in the table likely to be met. If that does happen then odds for a horizontal continuation to $127.8 as the "terminus" target, having the calculation Y3/X2 increase to over 70%. CLQ08 Waves Down from $145.85 If you cannot view the CLQ08 Waves Down chart, go here. If you cannot view the example chart, go here. The $133 and $127.8 levels are confirmed as important support targets because they are also confluent as retracements. They are the penultimate and ultimate 21% retracements for the moves up from the most important intermediate swing low of $84.33 and the low of $57.61, respectively. A final point is that $127.8 is the 13-week moving average, which again confirms that $127.8 is crucial support. If you cannot view the example chart, go here. So, the forecast is for $127 to hold and for prices to eventually recover to at least $148. Upon a close over $148 much higher prices could take hold. If the lower probability case, of a close below $127 does happen, or if prices are unable to close over $148 in the next couple of months, then we would look for a continuation lower, to test first a price of about $117 or so, the 21% retracement for the move up from $9.75 to $145.85 on the perpetual chart, and the 21 week moving average, with a possible continuation down to about $112, the 38% retracement for the entire move on the August chart, as shown above, and the 26 week (half year) moving average.

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Disclaimer: The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.