Two Buy Signals in Crude Oil

by Christopher Rowe, Technical Strategist, The Oxford Club
Market analyzing

To help us analyze this chart of light, sweet crude oil, let’s use two momentum indicators:

  • The MACD (Moving Average Convergence Divergence) indicator
  • The RSI (Relative Strength Index – not to be confused with “relative strength”).

The main portion of the chart shows the price action of light, sweet crude oil.

Just below the price action portion of the chart is the MACD indicator.

In this chart, the “MACD line” is green and the “signal line” is red. The signal line is the moving average of the MACD line, which is why it’s a bit slower to move.

There are two main requirements for a true MACD “Buy” signal. First, the MACD line must cross from below to above the signal line. Second, this must happen below the zero line (which is the midpoint of the indicator). “Buy” signals given when a price chart is in a downtrend are unreliable.

I pointed out some MACD “Buy” signals with the blue lines in the chart. The MACD just gave us a “Buy” signal on Wednesday.

At the bottom we have the RSI. When the RSI crosses above the 30 line, it’s a “Buy” signal. I drew green arrows from every legitimate RSI “Buy” signal to show where the price of light, sweet crude oil was at the time.

Notice I said “legitimate” RSI “Buy” signal. In relation to the MACD “Buy” signals, RSI “Buy” signals that are given when a price chart is in a downtrend are unreliable entry points for bullish positions. They become legitimate when the RSI makes a higher low that matches the lower lows in the price chart (a “positive divergence”). An example of this is the RSI “Buy” signal seen in November 2013.

Notice how the RSI gave us a “Buy” signal just over a week ago.

No indicator has a perfect track record. But these two momentum indicators are telling us light, sweet crude could be making a profitable move.

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