Last week I presented the concept of forecasting future price targets based upon patterns which develop within price movement. To illustrate, I used a long term chart of the Nasdaq which had created a pattern in 2011 that projected a future price that came within 2% of the forecast. While the accuracy was most excellent what I find very compelling is the chart identified this price 3 years before it happened.
This week I want to show not only a different pattern but also that price projections work across all investment types (since many don’t just invest in stocks and bonds). The chart below is a 3 year look at the daily price of crude oil. You can see in the highlighted area on the left hand side of the chart a double, divergent bottom formed in 2011. I have included the pattern’s projected price target in a callout box, which forecasted a high of 103.82. Price topped out 5 months later in March at 109.45, exceeding the target by 5%. While that is pretty good, it fell short of last week’s 2% miss on the Nasdaq
If you let your eyes drift to the right side of the chart you can see another highlighted area where the exact same divergent, double bottom has formed. This one started at the end of last year and has yet to complete. The upside target of this pattern is just under $109/bbl. Experience tells me that I should expect this target to fall short of the actual high we eventually see. Why? Because oil is a highly geopolitical “tool”, sensitive to Middle East disorder. In addition, it is a relatively thinly traded market making it subject to price swings. So, while I stated above that patterns work across all investment types, I find price projection accuracy can be quite variable when using vehicles outside of those which are highly liquid such as stocks and bonds. This does not mean they should be ignored. Au contraire, like any technical analysis it should be used in conjunction with other tools to create the most profitable investment plan.
In the meantime, keep oil on your radar and let’s circle back around and see how this pattern actually plays out. If I were a betting man, based upon the latest geopolitical cross-currents, I would put my money on a big miss to the upside as I expect price will exceed the target and maybe even by double digits. Remember, news ALWAYS trumps the charts.