Over the past five years the price of a gallon of gasoline in the US has formed a series of lower highs and higher lows. In doing so this vital commodity has traced out a large triangle pattern that could provide a profitable trade.
Over the past five years the price of a gallon of unleaded gasoline in the US has repeatedly touched a high of between $3.34 and $3.63. The price, which excludes taxes, has also begun to make a series of higher highs, and as the chart below shows, a triangle pattern is beginning to emerge.
A 6 year (weekly) logarithmic chart of Unleaded Gasoline (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
This type of pattern forms when neither the bulls nor the bears have enough strength to give the market a sustained trend. Over time energy builds within the pattern and eventually the price breaks one or other trend line, however the final direction of the breakout will not be known until it occurs.
How to play the pattern in unleaded gasoline
Typically traders watching a triangle pattern like to see a decisive breakout on strong volume before they enter a trade. However it is possible to profit from this sort of pattern before the breakout is seen.
Unleaded gasoline has just bounced off the lower blue trend line at $2.69 and is currently sitting at 2.82 (the price is currently around $3.53 when taxes are included). A long trade entered at the current level could easily be protected by a stop loss just below the lower trend line, and if the price moves back to the top of the range at $3.33 it would provide a decent 18% profit.
There are a number of factors that could help propel the price of gasoline higher, including a weaker dollar and increased demand thanks to the summer driving season. If the price does manage to break through the upper downtrend line it could rise to around $4.30.
Of course if the US economy continues to slow the price of gasoline could quickly reverse and so a stop loss is essential.