In my personal experience as an investor and trader, there has been one market that nearly always beat me to a pulp … oil. It always went higher than I ever expected it to when I was short and lower than I ever expected it to when I was long.
Now I know why … thanks to the VQ.
Oil is volatile … very volatile. In fact, it is one of the most volatile commodities in existence. Oil is 140% more volatile than gold. It’s even 40% more volatile than silver. It’s 85% more volatile than corn. It’s 100% more volatile than cotton.
Right now the current Volatility Quotient (VQ) on West Texas Intermediate Crude is 29.5%. That’s more volatile than Baidu (BIDU). This year alone, oil was down 29% in six weeks, up 95% in four months and now down 23% in the past seven weeks.
Oil catches fire … and burns hot.
I’m not sure why I didn’t think that oil should be that volatile. It’s probably because the market for oil is so massive that it just seemed to me that something so large couldn’t be so volatile. Not true.
All of this is a prelude to what I want to share with you today … my thoughts on where oil is likely headed this year. I believe that there is a big opportunity setting up to buy oil. But I also know, from past experience, that it will be very hard to make money off of it, even if I’m right.
Let’s begin with a look at the Stock State Indicator (SSI) chart on oil (West Texas Intermediate Crude). In spite of the 95% rise in oil earlier this year (from below $30 to over $50), oil has not yet triggered an SSI entry signal. It was last stopped out by our SSI system in September, 2014 at about $93.
Smart money sentiment has bottomed and is on the rise (middle section of the chart below). Open interest is also on the rise (bottom section of the chart below). When both of these indicators are on the rise, higher prices are likely to follow … in the next six to twelve months.
My current time-cycles analysis on oil suggests a bottom to the current correction in September-October of this year followed by higher prices into 2017.
My best guess for a near term low in oil, based on the volume-at-price analysis, is in the $35 to $38 range (which probably means it will go to $30 based on my history of underestimating oil moves).
There are, undoubtedly, some big moves coming in the oil market this year … and I’m personally intrigued by the idea of buying the next low. This time around, however, I’ll be armed with the VQ, volatility based position sizing and my Stock State Indicator system.
I’ll make sure that I know exactly how much I’m prepared to lose if I’m wrong (or early) and that I don’t take my profits too early if I’m right.
Here’s to lighting a fire … and not getting burned,
Richard M. Smith, PhD
CEO & Founder, TradeStops