We’ve all heard the story of our uncle’s friend’s neighbor who bought in on oil before it boomed, and he got filthy rich almost overnight. You listen to this story over Thanksgiving dinner every year and probably think two things. Why do I keep hearing this story, and why couldn’t that have been me?
In regards to that second question, it can be you. Oil stocks are actually fairly predictable commodities and their price can be ridden up and down just as any other energy or tech stock — if you know what to look for, that is.
Oil requires an eye for multiple fundamentals. A crude oil trading strategy would be incomplete without the explicit understanding that oil prices historically move in inverse of the US dollar’s value. Yet tracking the rise and fall of oil shares takes more than simply an eye for financial indicators.
For one, oil pricing is largely dependent on OPEC policy. Saudi Arabia and its partner nations meet biannually to ensure that oil production is hastened or slowed in order to maintain a reasonably stable price of the commodity. And considering that OPEC member nations own about 80 percent of the world’s oil reserves, they have been largely successful in dictating oil pricing. In fact, the Saudi led coalition of oil producers recently downgraded its estimation of the market demand, leading to a hiccup in pricing.
While often an indicator of an unwelcome investment, the bear market for oil actually creates a unique opportunity for investors to capitalize upon. Oil is down, but the price tends to flutter, creating multiple buying opportunities per week, or even per day. By aggregating a few market metrics which are readily available on consumer investment platforms and reading the “tea leaves” (so to speak) regarding recent price fluctuations in response to OPEC movement, it is clear that the market may very well see a surge in oil pricing.
Beginning with the history, the market has seen a negative correlation in recent decades to crude oil, yet this trend reversed as of late and a bull market is indicative of a bullish oil price. As well, OPEC cuts to production signal price strength rather than retreat, and likewise an increase to production often predicts a recession in price.
Considering the metric indicators, the Stochastic RSI figure most definitively correlates to crude oil price fluctuations, closely tracking the relative buying and selling patterns of investor clumps. When coupled with a figure known as the Commodity Channel Indicator (CCI), a savvy investor can read periods of overbuying to capitalize on a “buying reset” and buy just before a jump in price. The Stochastic RSI figure helps you to identify a trend in buys and, if viewed correctly, can filter out price fluctuations caused by computer modelling and legitimate investor interest (like your own) in a stock.
This is important because individual buying — over and above the corporate algorithmic processes — is important when spotting a trend. The CCI value helps us evaluate when a price is trending either bullish or bearish over a short span, and when we see a quick dip in the RSI alongside a corresponding rise in CCI value, it is highly probable that a rise is coming down the pipeline.
Crude oil is a fickle creature, and a combined metric analysis with real world market evaluation can produce a robust trading strategy for this highly prized commodity. If you use intelligent strategy to make your buys, who knows? You could be the talk of the table next year.