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GKP - A Review And Key Levels To Watch This Week

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A Review

The Gulf Keystone chart has become very interesting now so I thought it might be useful to review it in depth and also to see which levels will be important in the coming week and why. It'll be a lengthy piece so please bear with me.

We begin with the daily chart going back to the 260p high. This is where I believe wave C of the correction down from 450p started so it's good to look at the whole sequence from there because what we're trying to establish is whether it's complete or not.

This wave C should consist of 5 subwaves or a typical "impulse" or "motive" wave. These have a textbook form whereby wave 2 retraces 61.8% of wave 1 and wave 4 retraces 38.2% of wave 3. This is exactly what happened here; the 228p high was very close to the 61.8% Fib of the wave 1 down (I've not shown the Fibs as the chart already has enough going on but you can easily ploy them or even just use a calculator), and the recent rise to 166p hit the 38.2% Fib of the drop from 228p exactly. I'm completely satisfied with this sequence even though there's been a slight overlap between the top of wave 4 and the bottom of wave 1.

EWT has a rule which says that a wave 4 cannot enter the territory of a wave 1 except when the whole impulse wave is in the form of a triangle. Drawing lines between the tops of the (assumed) waves 2 and 4 and the bottoms of waves 1 and 3 clearly show a wedge shape, otherwise known as an ending diagonal triangle in EWT parlance. In this case the 5th wave would appear to have been truncated at 129.25p and this makes sense because an ending diagonal triangle is a very bullish end to a corrective sequence as it essentially has a foreshortened 3rd wave (the projection for this 3rd wave down from 228p was actually at 68p).

There is an alternative, bearish, interpretation shown here put forward as a possibility by Gary in the comments to the previous blog entry so please refer to his post at 11:32 on 05/07/13 for his thinking on that. I don't happen to think that's what's going on but it's good to be aware of all possibilities as we can never know for sure. Certainly, the 176/7p area Gary highlights as a possible reversal point is significant because that's where the downtrend resistance from the 260p and 228p highs will be on Tuesday and it's also the 50% retracement level of the 228p to 126p move as can be seen on my chart above.
So, why do I think it's the bullish version that's in play?

Well, from my first chart in this piece we can see that there's been a close above the wedge resistance and we also know that there's already been a wave 4/1 crossover which requires the diagonal triangle form, so any further high to around the 177p area would break that triangle form and perpetuate the downward channel in a manner which couldn't conform to EWT rules (unless there's something completely different going on which would require significant further lows).

In addition, the above weekly chart shows that on both a high/low and closing basis the weekly chart has a price breakout. Those price trendlines are a bit weak though in my view because neither have really been tested regularly during the trend due to the speed of the initial drop. What is more significant is the RSI breakout, since that has been properly tested at 228p and again in the recent move up to 166p so the weekly RSI is now clearly not in the same trend which limited the price to 228p.
Interestingly, too, when we look at the Fib retracements of the drop from 166p to 129.25p (shown left), we can see that price has already penetrated and closed above the 61.8% Fib which is where I'd have expected it to be capped at in the event of the bearish scenario. This leads us nicely on to what to look for next week.

Levels To Watch In The Coming Week

Clearly 166p is a hugely significant level as we can see on either of the above daily price charts. Not only is it the most recent high, but it's also the last high prior to the higher low in price at 129.25p so a breakout of that level would constitute a higher high. Higher highs and higher lows are obvious conditions required for an uptrend but the initial ones do not confirm an uptrend on their own (and corrective wave will normally also have a higher low/higher high combination which then fails), however, we've already seen that there are other reasons why we might suspect a new trend is in play here.

It's precisely because a break of the 166p level is so important (the higher high and the break of the wave 4 high) that I believe there will be a large increase in volume and a possible 20-30p move on the day it gets taken out, just as occurred when the SP made a higher high above 137.5p during the corrective wave 4 move. So what are the levels to watch beyond that?

Interestingly, the Fib retracement sequence shown in the chart immediately above, here, show the 161.8% and 261.8% retracements come in at 189.37p and 226.65p which are pretty much bang on previous price resistances. Also, going back to the original chart on this blog entry here, we can see that those levels also represent the 61.8% and 100% retracement levels for the drop from 228p to 126p.

Another level to watch will be the downtrend resistance from the 260p and 228p highs which was at c. 181/2p on Friday and drops by a penny or so each day. This is also in the area for the top of the bearish Gartley pattern shown earlier.
If that trendline resistance fails (which would almost certainly confirm the bull case of a new uptrend in my opinion), we also have some interesting convergence of Fib extensions (not retracements) for the very small waves we've already seen, shown here on the 4 hour chart, left.

The red Fib extensions show the projection of the 129.25p to 158p move (minute wave i) from the wave ii low. This comes in at c. 184.5p. The projections for the even smaller wave sequence, shown in blue, show that the 161.8% extension came into play perfectly on Friday, and that the 423% extension is also at that key level around 189p.

Following 3rd waves, we can normally expect retracements of around 38%, which happens to coincide with the 100% levels of the extensions, and could take the blue sequence back to c. 151p and the red sequence (assuming it plays out to that 185-189p area) back to test the 166p breakout level which makes perfect sense as a test of the new trend.

I hasten to add that this is pure theory. Prices can move beyond, or not even reach, the "standard" Fib extension levels, and retracements can also vary from the 61.8% and 38.2% levels.

In summary, therefore, the key price levels to watch for the coming week are:

151/2p - this should hold in order to confirm the very small scale blue sequence above and would be a good place to buy as there could be a nice tight stop below 149.75p. I also think this level will become important again later on (if I'm right).

166p - this would be the significant breakout point of a higher high and a break of the 38.2% Fib of the 228p to 126p move. This would give a high probability of a trend change but not yet guaranteed because of....

177/180p - this is the final chance for the bears to regain control, force the bearish Gartley and hold the downtrend resistance from the 260p and 228p highs. 

189p - this is a significant resistance both in terms of Fib convergence and a previous price high. If this level is seen, we would then need any immediate retrace to hold above 166/7p and then make a new high to pretty much confirm the uptrend.

203/6p - this should be roughly the area for the top on an initial set of 5 waves. It's a major level which has been hugely significant in the past as well as more recently (I've circled some of the more recent times it's come into play on the original chart here), and it's also the target for a double bottom breakout of 40p (166-126 added to the breakout point of 166p).

So, they're the key levels I'll be watching this week. We can't be sure which one(s) will come into play (if any) but there is a way of improving our chances of knowing in real time. Go back to the first chart on this post again and look at the RSI chart. That trendline at the top of the circle highlight is from the 450p high (there's another even higher from the 131p move which we'll visit in due course) so is very important. In my opinion, having broken the shorter term RSI trendline, we'll see the next one come into play and hold. When that gets hit, price should be at one of the key levels above. 
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