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The Most Important Technical Tool For Energy Traders

The oldest debate in trading and investing is the relative merit of technical versus fundamental analysis. Most technical analyses are, at their heart, about identifying points at which support and resistance have appeared in the past and are likely to appear in the future. That is important information, but any predictions that result are rendered moot by a shift in fundamental conditions. When it comes to commodities such as oil, however, price itself can produce that fundamental shift, so a technical metric that measures momentum shifts can be especially useful in that and related markets.

Recently, even as demand expectations have varied, oil pricing has been dominated by the supply story. Agreed output cuts from OPEC and their partners pushed oil up from its lows but increasing U.S. output halted and reversed that move. The thing is, supply is inherently price-sensitive. Higher prices encourage and enable increased production then, when that comes online, price tends to fall until supply reduction results.

That cyclicality is, to some extent, predictable and can be measured by certain metrics. When it comes to oil, the most reliable of those recently has been the Relative Strength Index (RSI).

RSI is, in chart analysis terms, relatively new. It was first introduced in 1978 by J. Welles Wilder and is a measure of the relative strength of moves up over moves down during a given time, usually 14 time periods. The last 14 readings are then averaged to smooth…

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