My favorite oil trading indicator just flashed a “sell” signal.
Traders who bought oil in early May – based on this indicator’s buy signal – should lock in profits on the gooey black stuff right now.
The price of oil is likely headed lower in the days ahead.
Yes, the price of oil is up about 8% since we got that previous buy signal.
Saudi Arabia is cutting back on production. The United States is looking to build up its strategic petroleum reserve. And, Goldman Sachs thinks oil is headed to $86 per barrel by the end of the year.
So, there are plenty of reasons to be bullish on oil.
But, there’s one really important reason to be bearish…
The Oil Volatility Index (OVX) flashed a sell signal last Thursday.
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 sell signals when the index drops below its lower Bollinger Band.
Over the past year, we’ve had six sell signals (red arrows). The most recent one was generated last Thursday.
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 has just generated a sell signal.
This is NOT the time to buy oil. That time was several weeks ago – when the OVX flashed a buy signal.
Now it’s time to sell oil.
We’ll look to buy it again once OVX rallies back up to its upper Bollinger Band.
Best regards and good trading,
Jeff Clark
READER MAILBAG
Are you making profits on oil with the latest rally?
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