In mid-March, the Oil Volatility Index (OVX) generated a buy signal when it closed above its upper Bollinger Band.
At the time, I suggested “traders should be looking for higher oil prices over at least the next couple of weeks.”
That was not a popular opinion, to say the least.
The price of oil was in free-fall, down 15% in seven trading days. The “experts” were telling us oil was falling because of fears of a global recession, and the price was headed even lower.
But one of the most reliable oil-trading indicators was telling us it was time to buy.
Traders who did that have a nice profit today. The price of oil is 17% higher today than it was in mid-March.
And today, traders should lock in those gains.
The price of oil has surged back above $80 per barrel. The experts are now telling us the price could reach $90, or even $100 within the next few months.
But OVX has fallen all the way back toward its lower Bollinger Band. It’s now on the verge of generating a sell signal for oil.
Take a look at this updated chart…
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.
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On the OVX chart, we get sell signals when the index drops below its lower Bollinger Band.
Over the past year, we’ve had seven sell signals (red arrows). And the chart is on the verge of generating another one. It will only take a slight push higher in oil to do the trick.
Here’s how the price of oil behaved following the previous sell signals…
The price of oil declined immediately following all previous sell signals over the past year.
However, the strongest signals occurred when West Texas Intermediate Crude (WTIC) was trading near its upper Bollinger Band.
That’s the setup we’re looking at today. WTIC oil is trading near its upper Bollinger Band. And OVX is on the verge of generating a sell signal.
This is NOT the time to buy oil. That time was three weeks ago.
Of course, the price of oil could still push higher from here for a few more days.
But given the look of the current setup, any immediate rally from here is going to be limited and will likely reverse.
Best regards and good trading,
Jeff Clark