What Next For Crude Oil?

Right now, Crude Oil prices are in major focus, as it is one of the hottest things to trade in the market and has been for some time. It has been in a strong downwards trend for several months, falling from over $100 a barrel to less than $30. It fluctuates in value by large amounts, and daily price changes greater than 5% have not been unusual. This is a lot of volatility.

It is normal that whenever one of the most significant commodities such as crude oil falls to a historically very low price, speculation immediately turns to how low it is going to go before it turns around. A quick search of the internet using the right search terms will bring up a lot of articles purporting to explain that the price of crude oil will eventually reach $10, or cannot possibly fall lower than $20, etc. The authors will usually be using economic fundamental analysis as well as an analysis of oil supply, which really is an important issue with commodities such as oil, unlike currencies where supply is rarely a factor.

Fundamental and supply analysis both have an important place in trading commodities such as crude oil, but I strongly believe that the best thing that a crude oil trader can do is ignore this speculation, at least until the price chart starts to look noticeably different. Fundamental analysis should be used as a confirmation of technical analysis and not the other way around.

Don’t Pick Bottoms!

The problem with this speculation is that it is a psychological distraction that traders fall for. Traders are trying to convince themselves they can pick the bottom price, exit any shorts for maximum profits, and then start buying and sit tight while they wait for oil to get back up to $100 per barrel again, or some similar high price. There are so many things wrong with this approach it is hard to know where to begin!

Let’s start with two old trading maxims that are as old as the hills: “It’s a bear market, you know” and “The first 1/8th is the most expensive 1/8th you ever tried to buy”. The market in crude oil is a bear market. The price is in a strong downwards trend. At the time of writing, the price made a new 12 year low yesterday. There is no question about the trend: the price is lower than it was 1 month ago, 3 months ago, 6 months ago.