The price of oil has been crushed.
Two weeks ago, the black liquid gold was trading for more than $80 per barrel. But yesterday, it was below $68.
The “experts” are telling us falling oil prices are discounting the possibility of a global recession. And in a recession, the demand for oil decreases. So, the lower price reflects that possibility.
But a month ago, the price of oil was rallying. So does that mean the “experts” were predicting an expanding economy?
I’m not sure following the experts is a good strategy for trading oil.
In fact, forget about the experts. Forget about OPEC deals. Forget about inventory reports. Forget about the economy “opening up” or “shutting down.”
If you want to make money trading oil, there’s only one thing to watch… volatility.
How to Trade Oil the Right Way
As we’ve seen from its recent 15% slide, the price of oil is volatile. It often moves 3-4% in a day. It can swing 20% or more in a month.
That sort of volatility can lead to huge profits if you know how to trade oil the right way – or painful losses if you don’t.
Today, I’m going to share with you my favorite indicator to use for trading oil. We first looked at it back in December 2021. It has provided several excellent trading opportunities since then.
Take a look at this chart of the CBOE Crude Oil Volatility Index (OVX) along with its Bollinger Bands…
Similar to the stock market’s Volatility Index (VIX), the OVX provides buy and sell signals whenever the price of oil pops outside of its Bollinger Bands (solid blue lines).
Bollinger Bands measure the most probable trading range for a stock or an index. When a chart pokes outside of its Bollinger Bands, it indicates an extreme move – one that is likely to reverse.
On the OVX chart, we get buy signals when the index rallies above its upper Bollinger Band. We’ve had six buy signals (blue arrows) over the past year. The most recent buy signal was triggered yesterday.
Here’s how the price of oil behaved following the previous five buy signals…
The price of oil rallied immediately following all previous buy signals this year. The strongest signals, however, occurred when the Bollinger Bands on the OVX chart were in an expanded condition.
Take another look at the OVX chart…
The Bollinger Band width is noted at the bottom of the chart. And the blue arrows point to expanded conditions.
Yesterday, the OVX chart triggered its first buy signal of 2023. And it’s occurring with the Bollinger Bands in an expanded condition.
There’s no way to know for sure if this marks the start of a short-term or an intermediate-term rally phase for the price of oil.
But based on the accuracy of this indicator, traders should be looking for higher oil prices over at least the next couple of weeks.
Best regards and good trading,
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Source: Jeff Clark Trader