• 2 minutes Oil Price Could Fall To $30 If Global Deal Not Extended
  • 5 minutes Middle East on brink: Oil tankers attacked off Oman
  • 8 minutes CNN:America's oil boom will break more records this year. OPEC is stuck in retreat
  • 2 hours Emissions Need To Be Halved To Avoid 3C Warming
  • 5 hours The Pope: "Climate change ... doomsday predictions can no longer be met with irony or disdain."
  • 51 mins Pioneer CEO Said U.S. Oil Production would be up to 15 mm bbls/day NOW if we had the pipelines. Permian pipelines STARTING Q3
  • 14 hours Hormuz and surrounding waters: Energy Threats to the World: Oil, LNG, shipping markets digest new risks after Strait of Hormuz attack
  • 15 hours OPEC, GEO-POLITICS & OIL SUPPLY & PRICES
  • 5 hours Coal Boom in Asia is Real and a Long Trend
  • 3 hours Solar Panels at 26 cents per watt
  • 9 hours The Magic and Wonders of US Shale Supply: Keeping energy price shock minimised: US oil supply keeping lid on prices despite global risks: IEA chief
  • 9 hours Magic of Shale: EXPORTS!! Crude Exporters Navigate Gulf Coast Terminal Constraints
  • 8 hours US to become net oil exporter in November: EIA
  • 6 hours US Shale Drilling lacks regulatory body.
  • 13 hours Trudeau approves Trans Mountain Pipeline
  • 16 hours The Latest: Iranian FM Says US Cannot Expect To ‘Stay Safe’
  • 15 hours The Plastics Problem
Alt Text

Oil Inches Higher On Falling Rig Count

Oil prices inched higher at…

Alt Text

Canada Can’t Get Its Pipeline Problem Under Control

Canada’s once-booming oil industry has…

Alt Text

Is Big Oil’s Plastic Bet Going Sour?

Oil majors are investing a…

Editorial Dept

Editorial Dept

More Info

Trending Discussions

This Previously Reliable Signal Looks Set To Flash Again

In trading, there are very few reliable technical signals, especially when it comes to predicting longer-term moves. Long-term shifts in direction usually come about due to fundamental changes in supply and demand, so past price action, the basis of technical analysis, is not a very reliable indicator. Some, though, are more reliable than others, and over the last two years there has been one signal for crude futures that has been worth watching. I wrote about it a few weeks ago, and is now close to being triggered for the fifth time in that period. It has been right, to varying degrees on all four previous occasions.

That signal is Relative Strength Index (RSI), or rather a slightly modified version of it.

RSI measures the strength of moves up and down in price over a given number of time periods. You don’t really need to know exactly how it is calculated, although if you do the information can be found here. Suffice it to say that it results in a number between 0 and 100 and that there are two signal lines, at 30 and 70. Crossing below 30 is considered to represent an oversold state, and therefore signals a buy, while above 70 signals the opposite.

Like all technical analysis, the biggest problem with RSI is that it can easily give false signals. That tendency can be reduced by looking for two successive crosses of the line and waiting to see a return to the “normal” band before acting. Then, if that fails take a small loss and if there is a third cross and re-entry, try again. That has happened, as I said, four times over the last two years, marked on the chart below by arrows on the lower plot.

Indicator

As you can see, each of those times, the multiple cross of the signal line and retracement have immediately preceded a significant reversal of direction. The least successful was at the beginning of last year, but even then, oil dropped around fifteen percent before bouncing back.

All of that is significant now because, after briefly crossing the line on March 20th then returning, RSI has re-crossed recently. Yesterday’s drop took us very close to the point where it returns below the line again which would, using the method outlined above, be considered a sell signal.

The fact that we are trading a bit higher this morning has delayed that, but it does serve to illustrate an important point about any signal-based trading over longer timespans…It is important to wait for confirmation before acting. The potential rewards are large enough that missing out on a few points by waiting is not a big deal. On that basis, yesterday’s brief return to a reading of below 70 would not have been enough to trigger a trade. If we move lower again however, and RSI holds below the level for a couple of days it will be.

As mentioned at the outset, there are no infallible signals. If, for example, there is a resolution to the U.S./China trade dispute in the next few days, and/or if the jump in U.S. inventories that sparked yesterday’s selloff turns out to be an anomaly, then we will move higher, no matter what the chart says. That makes it important that any trade triggered by a signal is managed properly, with realistic stop-loss levels that are adhered to. With that important proviso though, if you follow crude, now would be a good time to add RSI to your chart and watch for a confirmed move lower as a sell signal.

Trending Discussions


Leave a comment

Leave a comment





Oilprice - The No. 1 Source for Oil & Energy News