Written for First Post
November 12, 2011: The continued rally in crude oil since October has taken prices to an overbought level, which can result in a reversal in prices. It's time for investors long on crude oil to book profits and for bears to initiate short positions.

These fears naturally push the price of crude oil higher. Such a strong rally is especially bad for the oil thirsty India. The rise in crude prices could not only increase the already high inflationary pressures in the Indian economy but also push the weak rupee lower. However, based on the chart, crude is expected to fall lower once it hits the US $99 to $102 range. The prices of crude closed at $98.99 on Friday. (Click here for Crude oil chart ) We are looking at the weekly chart of crude oil continuous contract on the NYMEX. 

The range between $99 and $102 has acted as support and resistance areas in the past. Also a text book rule of chartists is past areas of support turn to resistance and vice-versa. If you look at the chart from left to right across the two white horizontal lines you'll notice the importance of the level. The two white horizontal lines demarcate the area between $99 and $102. On the left of the chart there are red arrows showing how prices hit the level and then fell, clearly indicating that sellers exceeded buyers. Areas where sellers exceed buyers are called resistance levels. 

Then prices break above the level to later fall back to the level shown by the left yellow arrows.  Once prices fall back to previous resistance, it acts as support, which leads to a rally. Then prices fall back to it again as shown by the yellow arrows on the right. Prices move sideways as they are at support and then fall. After a few weeks prices rally up to previous support, which is now resistance that results in a huge sell off. The area from where the sell off occurred is shown by the red arrows on the right of the chart.

Now notice that prices are back to the level from where crude oil sold off last time and was also resistance in late 2010. They say price has memory and often reacts as it did in the past. This means there is a high likelihood that crude oil prices may turn lower. 

There is also another reason that crude prices may fall. Look at the commodity channel index (CCI) at the bottom of the chart. CCI shows if an asset is overbought or oversold. Readings above positive 100 is treated as overbought and under negative 100 oversold. Right now the CCI reading on the weekly chart is positive 194.70, which highly overbought.

There is a lot of news about Iran and Europe that is said to be positive to oil prices. But objective price watchers will surely know now is not the time to buy but sell. If prices continue to rally above our resistance level we'd give up the bearish bias. Just keep in mind that even above $102 all way to $106 there is still selling pressure.