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Time To Buy Oil

|Includes: The United States Oil ETF, LP (USO)

Original article, and more like it, posted at opportunityidentified.com

Do you know the best time to buy oil? Or, any asset for that matter? It's simple, yet we all love to make things more complicated than they need to be. The simple answer is that we should buy an asset when the reward dramatically outweighs the risk. So, when we hunt the best opportunities, we need to be able to identify the risk and reward. Technical analysis allows us to do just that. When we study price (aka technical analysis), we can see the dynamics of supply and demand at work. When we study price, we are studying economic law, not theory. When there is more demand than supply, price goes up. When there is more supply than demand, price goes down. And for the last 18 months, we've seen plenty of supply when it comes to the price of one of the world's favorite commodities: OIL. In that timespan, the price of oil dropped 74%. Anyone recognize that percentage? (HINT: Read yesterday's research article. Could they be related? Um. Yes.)

Technical analysis showed us that there was no reason to own oil back in early August, 2014. There was too much risk compared to the potential upside reward. Once West Texas Crude ($WTI, $WTIC) broke $96, it was apparent there were more sellers than buyers. Supply was too great. A year and a half later, and things have changed. We are seeing buyers step in at current levels. Let's take a look.

The chart above is a weekly chart of West Texas Crude dating back to 2007. We can see the low in late 2008 / early 2009, where oil found demand (aka buyers) near the $35 level. We can also see where oil broke down in late summer 2014 and dropped precipitously through that important 2008/2009 low. However, the last few weeks have changed the demand/supply dynamic. The price action during this time has been very constructive for this important energy commodity. Buyers have stepped in and price has broken through the year and a half downward trend line. In addition, price is back up to that very important $35 level.

Moving in a little bit closer on this weekly chart, we can see that momentum and price have been diverging for over a year. Momentum leads price. When this condition lasts long enough, it can create some pretty powerful price moves once price decides to catch up to momentum. In addition, we can see that if price were to break above the important 2008 / 2009 level, a false breakdown will have taken place. As we wrote yesterday, from false moves come fast moves in the opposite direction. The weight-of-evidence suggest that buyers are back in a big way and it's highly likely oil will move quickly upward if price can push through the $35 - $37 window.

Now that we know upside reward is likely, we need to know when our opinion is wrong (assuming a position is wrong is a great way to remove yourself from bias and opinion). We don't care about being right. We care about being on the right side of the trade. By identifying previous areas of supply and demand, we can identify a proper exit and practice prudent risk management. Using the daily chart, it's easy to see the importance of the $33.75 price level. That price defines our risk. If the price of oil is below $33.75, we're no longer interested.

Keep it simple.

Disclosure: I am/we are long USO.

Additional disclosure: Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.