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Cramer’s charts track volatility in the tight crude oil market

In light of the tug-of-war in the crude oil space, where prices have traded between the low $40s and low $50s since March, Jim Cramer used the charts to try to foresee the commodity’s future.

“Despite all of the crude bulls out there, and boy, we’ve got way too many of them, the truth is that we’ve simply got too much supply for crude to mount any kind of sustained rally,” the “Mad Money” host said.

So Cramer took to the charts of technician Carley Garner, co-founder of DeCarley Trading, Cramer’s colleague at RealMoney.com and author of Higher Probability Commodity Trading, to see what could give in the world of oil to push the commodity out of its range.

Oil’s trajectory has been particularly problematic for traders in recent months. As soon as it approaches the top of its range, buying dies out and prices slide back down. As soon as it looks ready to hit a new low, prices bounce back.

“So many traders assume the momentum will continue in either direction, and they keep getting caught on the wrong side of the trade, which Garner says is exaggerating the volatility of the oil market,” Cramer said.

Analyst commentary further exaggerates the noise. When analysts start to sound more bearish, oil bottoms and restarts its climb. When they get bullish, oil drops back down.

Moreover, oil historically sees a dramatic decline in July, recovers shortly thereafter, then starts to break down again in the fall, so Garner does not expect a meaningful rally anytime soon.

With that in mind, Cramer turned to Garner’s weekly chart of West Texas crude oil. Since prices recently bounced from their lows, Garner could see them moving back to $50 a barrel, though not much higher given two strong, established ceilings of resistance at $49 and $51.

“At the same time, we’ve got a floor of support in the low $40s. So the next time you feel like going all in on the oils near $50, please just refer back to this chart,” Cramer said. “Above $50, many producers in the Permian [Basin] can come in and make a fortune selling oil futures, so the market gets flooded with new supply, and when you increase supply without boosting demand, prices go down. That is economics 101, people.”

That said, Garner could see oil going lower than its low-$40s floor, although volatility in the market makes it difficult for her to guess when the plunge will happen.

The technician predicted that the end of Wednesday’s selling could bring about another lift for crude prices, but not enough to pass $50.

“Once that happens, we go right back down to $40, and perhaps even fall to the high $30s, which is why Garner’s tentative target is for oil is $39,” Cramer said.

Cramer pointed to two key momentum indicators, the Relative Strength Index and the Williams percent R oscillator, to support Garner’s theory. Both of them show growing underlying weakness in oil prices’ trading volume.

“Don’t let the breathless commentary fool you,” the “Mad Money” host concluded. “The charts, as interpreted by our own Carley Garner, paint a very clear picture: even as it see-saws between the low $40s and the low $50s, oil is stuck in a tight trading range, at least until something changes, like a geopolitical event that can cut back production worldwide, at least, or a dramatic slowdown in U.S. drilling — maybe the rig count comes down big on Friday — or a huge pickup in oil use. Right now, though, none of those seems to be in the cards.”

Watch the full segment here:

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