When it comes to trading oil, there are two key components to focus on.
One of those is the supply-demand story, of course.
For example, in mid-2018, oil had just staged a major rally from $59 to $73 a barrel. And most likely, noted most analysts, it had a way to go.
Even Goldman Sachs believed it to be true.
Despite a plan by Saudi Arabia and Russia at the time to revive production after over a year of cutbacks to clear global glut, the bank believed that the latest oil price correction was only temporary. “The current level of the market deficit, the robustness of the demand backdrop, and the rising levels of disruptions all set the stage for inventories to fall further,” noted Goldman Sachs analysts, as quoted by Bloomberg. “The proposal for the Organization of Petroleum Exporting Countries to lift output will require additional increases in production in 2019, which will further reduce already limited spare capacity next year.”
We also had to consider that in the U.S. alone, demand was so strong that crude oil inventories had been falling sharply for months. In fact, according to the Department of Energy U.S. crude inventory has dropped 20% year over year.
Plus, with U.S. economic growth still strong, oil demand should continue to rise.
Demand wasn’t a problem at all.
Supply was, according to the International Energy Agency (IEA), which projected that demand would outstrip supply for the rest of 2018.
We also had to keep in mind that “supply shocks” were highly probable, too.
Venezuela’s economic crisis, for example, had caused a near-collapse of its oil industry – putting more than a million bpd at risk. Production in this part of the world had already dropped to about 1.4 million barrels a day in recent months – a 40% drop since 2015.
That tug of war creates a sizable argument for further upside in oil prices.
But we can’t just buy oil based on that information alone. We must also be well aware of the technical picture, too. In fact, if you examine the technical pivot points of oil, you’ll be able to tell with up to 80% accuracy when you should buy and exit.
All we have to use are the Bollinger Bands (2,20), MACD, RSI and Williams’ %R (W%R).
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Let’s start with the Bollinger Bands (2,20) going back a couple years. Notice what happens when the upper or lower Band is hit or penetrated. Shortly after, the price of oil pivots.
Then again, we can’t just rely on the Bands to tell us when to buy and sell, right?
So we begin to confirm a bit more.
When RSI nears its 70-line, oil is considered overbought. When it nears its 30-line, oil is considered oversold.
We then look at MACD for spikes. Look at what happened between March and July 2017. MACD plummeted three times to historic lows. RSI was also at the 30-ine with the price of oil at the lower Band. Each time, oil pivoted and ran higher.
We can confirm again with Williams’ %R (W%R).
Each time W%R moves to or above its 20-line, oil is considered overbought. Each time W%R dips under its 80-line, oil is considered oversold.
When each of these indicators aligns, we can tell with up to 80% accuracy when a pivot is likely.
In short, while you should always be well aware of the supply-demand story, also be sure to understand the technical picture, too.
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