The Trend

Trading Secrets: One of the Easiest Ways to Trade Oil Prices

For the better part of 20 years, I’ve noticed an interesting pattern with oil.

While OPEC, non-OPEC, supply-demand, and international chaos certainly play a major role in determining direction, oil prices often fall within a predictable technical pattern, as dictated by excessive fear and greed.

Here’s a two-year chart of oil prices for example.

In it, we use Bollinger Bands (2,20), relative strength (RSI), MACD and Williams’ %R -- our momentum indicators that tell us when the herd is too greedy and too fearful. 

Putting aside fundamental arguments for oil, look at what happens to the price when it’s pulled too far, too fast in one direction using these technical pivot points.

Let’s start with the short side of oil over the last two years.

One, notice what happens when the price of oil hits or penetrates the upper Bollinger Band. Shortly after, it begins to pivot and drop about 80% of the time.  Of course, we never want to use just one indicator. So we begin to confirm with RSI.

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Two, notice what happens with oil is at its lower Band and RSI is at its 70-line.

Three notice what happens when MACD spikes too far north.

And four notice what happens when Williams’ %R runs to or above its 20-line.

Each is confirming an overbought indication at the upper Bollinger Band. The second they all agree, oil begins to pivot and slide south.

You can clearly see that.

Now, reverse everything. Look at oil at the lower Bollinger Band with RSI at or near its 30-line, and with Williams’ %R at or near its 80-line. We can confirm this further with a significant drop under 1.0 on MACD. The moment all of the momentum indicators align in oversold territory, oil begins to turn and run higher.

Of course, the fundamental story behind oil is important, too.

And by no means are we recommending that you ignore that. But when technical pivot points behind oil prices behave as they have, we can’t ignore the potential.

What you’ll also notice is that a lot of oil names will fall into the same pattern.

Look at Chevron Corporation (CVX) for example.  It’s been one of the most ugly charts we’ve seen. But look at what happens the moment, RSI, MACD, W%R and the Bands align in either overbought or oversold territory.

The stock pivots and moves in the other direction.

Granted, this strategy may not work 100% of the time.  But with a 20-year accuracy rate racing toward 85%, it’s well worth your attention.

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