Price Expansion in Crude Oil

Recently, Crude oil (Crude) traded below its range it had formed over the past three months. Typically narrow trading ranges like the one exhibited by Crude are followed by swift expansions. This time was no different.

One technical tool that is used to measure a trading range is Bollinger Bands. Bollinger Bands were developed by noted Technician John Bollinger. They are volatility bands that are placed two standard deviations above and below a moving average. As such, the bands naturally widen when price ranges expand and narrow when the standard deviation of price decreases.

In practice, a 20 period moving average is used to plot the average value of price over the past twenty days. Then, the 20 period standard deviation is subtracted and added to the midpoint value to create the lower and upper bands, respectively.

Traders can use the upper and lower bands as well as the moving average to generate trade signals.

For example, when Crude closed below the boundary of the lower Bollinger Band for several days in a row it was indicative of a strong breakout in that direction. In other words, breakouts that close outside of a two standard deviation range are typically reliable and sustainable.

Alternatively, some analysts may have interpreted the recent trading range as an ascending triangle with an upper boundary along 54. Often, when a price frequently touches a certain level (e.g. a trend line) and then proceeds to close beyond that level it is indicative of a significant shift in sentiment.

The move down in Crude displayed speed that is unlikely to reverse immediately. Instead, traders should watch for a bear flag to form between 47 and 49. Based on the daily chart, the next levels of support are either 45 or 43. However, a measured move from the range expansion would imply another 4 points of downside potential if Crude closes below its current lower support level around 47 to 48.

As always, a protective stop should be used to manage your position risk. Depending on the risk profile for you as a trader or your client it would be reasonable to place a stop above the Bollinger Band moving average. A close above this key level would indicate another possible shift in price direction or, at the very least, short-term indecision.

As always, please feel free to contact me with any comments or questions. Thanks for reading.

John

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