Oil’s Bullish Setup: Double Bottom Plus Flag Formation

Bull Flag Forms

Over the past month, crude oil has formed a small declining trend channel after rebounding sharply from a second and slightly higher trend low of $55.65 that was established in early May. This small channel carved out a potential bull flag pattern within a larger double bottom reversal pattern. Given the current configuration of the flag an initial upside breakout would be indicated on a rise above $64.18 for a first signal, and then on a move above the recent swing high of $64.61. 

Flag Points to $72.52

Following the $55.65 low the price of crude oil rallied by $8.38, or 15.1%, in only six days. That rally established the pole portion of the flag pattern and is used to calculate a minimum target based solely on the flag. An estimate using $64.14 as a breakout level points to a potential target of $72.52. The important point is not whether the target is reached, but rather that a bullish breakout implies higher prices. If the flag breakout performs, a breakout of the double bottom would trigger next. 

Weekly Chart Perspective

The weekly chart provides further context, showing crude oil contained within a large, declining trend channel. Why might this be important? Once price reverses from one side of a channel or price pattern there is the potential for it to eventually reach the other side. This doesn’t mean that the other side will be reached, just that it is a possibility and needs further evidence. Potential initial targets from the two price patterns provide support for the idea of an approach, if not a touch, of the top channel line, if a bull reversal triggers.

Possible Double Bottom Established

As noted, the bull flag is contained within a possible double bottom trend reversal pattern. Following the first trend low in April, crude oil rallied to a trend high of $65.38 before falling and establishing the second and slightly higher swing low in May. That rally high is the neckline of the double bottom, and a daily close above it will provide bullish confirmation. Measuring this pattern points to a potential upside target near $67.74, further supporting the case for potential gains if a breakout occurs. 

Potential Upside Targets

Another key point to consider is that previous long-term support was at a 38-month low of $65.38 until a breakdown triggered in April. Therefore, a daily close above that price level, now resistance, will provide a sign of strength. Furthermore, the declining channel (red) has a midpoint (dashed) that will have been exceeded by then as well. Other important price levels that may see resistance include the 200-day moving average, currently at $69.15 and falling, and a prior lower swing high at $72.44. Keep in mind that the potentially bullish patterns are not valid until they trigger and then confirm with a daily close above the breakout level. 

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