Enjoying Holiday Gasoline Prices? Better Not Get Used to Them.

Gordon Scott |

Gas prices have been going down. Recent Facebook posts and tweets I’ve seen have included comments like, “Who would have thought that I’d be excited about paying $3 a gallon for gas?” or “I know it’s 2.99, but I’m just excited to see the TWO again!” Is this low price a Christmas card from the White House in hopes to solicit better poll ratings as the final push for campaign fundraising heats up? Is the extra supply of gas a function of increased OPEC production for some purpose? Whatever the reason might be, the general direction of gas prices may be about to change.

Consider the following chart of United States Gasoline (UGA), the ETF that tracks Gasoline futures. It has a very clearly defined pattern in the price. What’s more the pattern is quite lengthy and holds all the textbook elements to confirm a significantly higher price target at some point midway through 2012. Oddly enough the pattern is actually one that most people would naturally classify as bearish. But this version happens to be an exception to the rule.

Notice this weekly chart of UGA contains important clues about where this ETF is poised to go next. The price of gasoline has held support for a period lasting the better part of 2011. That support line, corresponding to roughly 45.25 on UGA, has been successfully tested over half a dozen times. A descending resistance line gives the pattern its name, descending triangle, and moves from a high of just over $55 down to a current level around $50. But it is the third component of this pattern that makes it exceptional.

An Exceptional Rise in Price

The left most green line maps an upward price move preceding the consolidating prices. (It’s similar to a flagpole in a flag pattern.) Usually the descending triangle begins with a downward trend in the price and consolidates against a horizontal support level.  But when this pattern of horizontal support and descending resistance is preceded by a rapid rise in price, it creates the potential for a rapid rise once the price breaks through the upper boundary.

The final confirmation is the volume pattern. In this chart the volume rises during the rapid price lift before the pattern and falls as the consolidation wears on. Notice carefully if you can that each touch of the support line is accompanied by an accumulation day (a volume peak of one kind or another).  These characteristics are commonly observed in successful breakouts because they imply that the consolidation is a low-energy interval in a higher-energy trend, a trend that will resume was resistance is broken.

What might these signals mean for the future?

Typical price target strategies include using the distance and angle of the rapid price ascent as a template for the predicted, post-consolidation move. This concept is delineated by the right-most green line in the chart above. Such a move may take a few months to complete, but could put the price of UGA up $15 in the neighborhood of the $65 price level—or higher.

Some additional reasons this might come about include the fact that the US Dollar has hit a short-term high and could easily trend lower again in the near future. Political unrest in the middle east, if it flares up during the spring months again this year, could cause oil production constraints driving prices higher. And lastly, the Commitment of Trader’s report for Euro futures has hit a low mark, a point from which historically it begins to rebound, implying a rise in the Euro.

The kind of a move described here would equate to the appearance of greater than $4-per-gallon gas (likely approaching $5 in some areas) right as President Obama battles against head-to-head against the chosen one amongst current Republican hopefuls. It’s not the kind of cheery headline he would want to have as a backdrop to his candidacy. So unless a constituency of wealthy democrats deems its best campaign contribution is to begin aggressively short-selling gasoline futures over the next six months, Republicans across the country may actually be excited to tweet about $5-a-gallon gasoline at the pumps!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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