Analysis: Oil Search Limited 2010-2011
Chart formations can emerge over the span of a few days, in the case of candlestick patterns, or a few weeks to months for most chart patterns. In the case of chart patterns, several formations may form across a larger timeframe, developing a series of succeeding formations for as long as the market dictates. The broader context of price activity may, however, reveal an even bigger pattern at work, which encompasses the smaller formations and provides traders with a big picture view on how the stock is positioned to perform.
Even without the smaller formations that comprise the larger pattern, events on an extended timetable remain perhaps the best indicator of future price action. For the long-term trader, this is often the only way to trade, preferring to hold open positions until a pattern completes or fails. Shifting to a candlestick-by-candlestick or pattern-by-pattern view may be occasionally necessary, but overall it is the prolonged price action of several months to years that informs long-term performance.
Oil Search Limited (OSH.AX) is a good example of this principle in action. The chart below shows the stockâ€™s price activity for most of the past two years from 2010-2011.
trading.com.au/wp-content/uploads/2012/01/Analysis-Oil-Search-Ltd-112211.gif”>If one were to zoom in on a shorter time period within the 24 months on display in the chart, one would be able to parse out several distinct patterns which have contributed to the stockâ€™s overall movement. Double Bottoms, Double Tops, Scallops, Cups with Handles, Rounding Bottoms; these are only a few of the patterns to be found here. And, while these can be useful to positioning a trader for short-term breakouts, the more interesting pattern currently developing is the one on the 24-month scale.
The larger formation was aided tremendously by the success of OSH in reaching an all-time high of 7.640 on 11 April. This created a crest in movement which heavily informs the possible direction of the stock in the coming months and well into 2012. It also helped establish a new level of resistance at 7.600 as the share quickly retreated from its high and returned to test support at 6.800 and 6.558.
Along the way to its high and the aftermath, OSH has established several major and intermediate levels of support and resistance. All told, seven separate and unique levels have emerged, each one leading to the gradual tapering of price activity. And it is within these support-resistance levels where the 24-month pattern begins to take shape.
As seen on the chart, price has gradually shrunk inside the range between resistance at 6.558 and support at 5.470. The appearance of support-resistance at 6.080 and 5.812 suggests that price may begin funnelling even further into a tighter range, although the upper and lower trend lines on the chart indicate the stockâ€™s direction is poised to be restricted inside 5.812 and 5.470. In essence, then, if the temporary support-resistance levels continue to be tested as they have been and assist the increased tapering of price movement, OSH will confirm a Consolidating Symmetrical Triangle, one of the best performing chart patterns in a bull market.
Consolidating Symmetrical Triangles break upward over 50 percent of the time, which puts OSH in position to possibly test 7.600 twice in the same year. Of course, the 46 percent chance of a downward breakout is not particularly high, but it is close enough to random that the Triangle could break in either direction. As the stock continues to consolidate toward the converging trend lines, a more in-depth analysis of individual chart patterns may be necessary to better inform breakout potential. This is one of the finest examples of how smaller chart patterns can enable long-term traders to position themselves for a larger pattern breakout.
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