Making a prediction on the oil price using technical analysis:
The major tool that enables you to make a forecast in the oil price is of course the technical analysis; this means the analysis of live charts displaying the prices per barrel of oil. These charts provide us with valuable indications on the movement possibilities of the oil price over the short and long term.
For this, you need to know how to interpret the different indicators that you can find on these charts such as the following:
- The trends: The trends are easy to detect and correspond to the marked rising or falling movements. The stronger a trend, the more it is likely to continue in time and the same to the contrary.
- The volatility: This is the strength of the current trend. The higher the volatility, the more probable it is that the trend will continue for a while.
- Technical support levels: A support level is the lowest level previously attained during a trend. If this level is passed then the falling trend is confirmed and the price will probably continue to drop. If the support level is not crossed then we can expect a reversal with a rising trend to follow.
- Technical resistance levels: A technical resistance level is the exact opposite of a support level. It is the highest level previously attained during a trend. When this level is passed during a rise, the rising trend should continue. In a case to the contrary, this announces a return to lower prices.
Other technical indicators do exist but they are too complex to cover here.
Identifying the oil trend using moving averages:
The moving averages can be used over long or short periods according to your trading method. They therefore enable you to identify trends over the short and long term.
On the charts, a flattening or reversal in the moving averages enables the detection of a change in the trend. It is also important to pay attention to the position of the spot rate relative to this moving average. The crossing of the moving averages also represents a strong buy or sell signal. For example, a 50 day moving average that passes under a 20 day moving average represents a sell signal and a 50 day moving average passing above a 100 day moving average indicates a buy signal.
Identifying an oil trend with the MACD:
The MACD, or Moving Average Convergence Divergence, indicator enables you to anticipate a reversal in a trend in a more precise manner than with the moving averages, notably for short term movements.
On the charts, the MACD is represented by a signal line and the MACD line. When these two curves cross over we obtain a buy or sell signal. Therefore, when the MACD line crosses above the signal line this indicates a rising trend, and vice versa.
This type of indicator is one of the easiest to learn, technically speaking.
Identifying an oil trend using Bollinger Bands:
Visually, the Bollinger Bands are represented by three curves, one represents the moving average over 20 days and the two others are situated on each side of this major curve at two standard deviations.
This indicator enables the identification of the strength of the current trend. Therefore, a highly volatile oil trend will show larger bands with a major deviation. Conversely, when the trend is weak and unreliable we can see an equally weak deviation with tighter bands.
When the oil price approaches the lower curve this indicates a strong buy signal and vice versa, when it approaches the higher band this indicates a major sell signal.
With this information it is therefore possible to detect both the direction and the strength of the oil trend.
Making a forecast on the price of oil using fundamental analysis:
Another method of analysis that enables you to anticipate the rise or fall in the price of oil is the fundamental analysis. This consists of using non-technical data to predict the reaction of the oil market.
For this, you simply need to consult the economic calendar on which the events are marked that could influence the oil price. Among these events are the following:
- Movements in oil stocks: Rising stocks lead to a drop in the oil price, and the same to the contrary.
- Announcements from oil producing countries.
- Movements in the U.S. Dollar value inversely correlated to that of oil. This means that a strong dollar makes oil less attractive to foreign investors which will tend to cause a drop in demand and therefore the price.
Of course, to make a reliable forecast on the oil price it is judicious to use both fundamental and technical analyses.