Get ready to buy oil… again.
The last time we ventured into the oil patch was back in March.
The price of the gooey, black stuff had been crushed – falling from over $80 per barrel to $68 in just two weeks.
The “experts” were bearish. They pointed to bloated inventories and fears of a global recession. And, they told us the price of oil was headed lower.
But my favorite oil trading indicator was flashing a “buy” signal.
So, we ignored the experts and suggested oil would be trading higher over the next few weeks.
Less than one month later, oil was back to $81 per barrel. Traders who acted on our buy signal were up nearly 20%. And, we recommended locking in those gains.
Now here we are, less than one month later. The price of oil is back down near $70.
The experts are bearish again, suggesting that bloated inventories and fears of a global recession are going to pressure the price lower.
But, once again, our trusty indicator is nearing a buy signal.
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 five buy signals (blue arrows) over the past year.
Here’s how the price of oil behaved following those signals…
The price of oil rallied immediately following all previous buy signals over the past year (blue arrows).
Sometimes the rallies were significant, lasting several weeks. Sometimes the rally ran out of fuel within just a few days.
But in every case, it was better to be a buyer of oil than it was to be a seller when the OVX generated a buy signal.
On Tuesday, the OVX closed just below its upper Bollinger Band. So, it hasn’t generated a buy signal yet.
But it’s close. We are nearing a buy signal for oil.
And based on the previous success of this indicator, once the buy signal occurs, traders should be looking for higher oil prices.
Best regards and good trading,
Jeff Clark
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Source: Jeff Clark Trader