The sell signal in the oil market

Oil has been a dramatic massive decline for more than a year and a half. But when could investors have spotted the sell signal in the oil market?

Research shows the best timely buy and sell signals or indicators come from the market(s) themselves. So let's look at the oil market and see what could have been identified in real time.

When looking for a buy or sell signal, investors are essentially looking for anything that reveals a change in the trend. The price action is the number one indicator since it is the market, factually, and ultimately the only variable that impacts results.

In the first chart below we have a chart of oil starting from April 2013. Each vertical line represents one week of price action. Take a moment to get oriented to the price behaviour in the oil market. From September 2013 to June 2014, oil was range bound trading between approx. $110/bbl. at the high and $90/bbl. at the low. But a break down developed. Let's analyze how it unfolded.

Unfortunately, the weekly chart doesn't provide enough detail so we've isolated the daily price trend during this time period so we can see more detail. It's in the second chart below with significant market price action highlighted.

How the big decline could have been avoided

The first signs of a breakdown are marked at the first red arrow with an "A" beside it in the chart above. Investors may be forgiven for missing it or even ignoring it outright, but the market continued to deteriorate. The breakdown highlighted with the "B" highlights a factually based and systematic evaluation. See it directly below. Oil was getting worse in a clear change in behavior confirmed at point "B".

A sell signal doesn't tell investors how far a market or security may fall but it does manage risk effectively by keeping capital out of a new down trend. But there's something more interesting in the analysis of the oil market and the related sell signal. See below.

But wait, there's something even more significant

In the chart below, we have a line graph of the price in oil from 2010. We can see oil had been range bound from late 2010 until it undercut the range in 2014 as shown above. Here's what's significant about this.

Oil did not provide a buy signal following the peak in 2010. In fact, despite oil's ability to hover around near the high until 2014, commodities peaked in January 2011. When commodities or resources as a group are in downtrends, there is no reason to attempt to invest in any commodity market despite being better than others. The U.S. stock market was clearly the superior performer from January 2011 providing investors with plenty of choices based on the number one indicator for picking investments in the financial markets; superior performance.

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Commentary including ideas, historical and other market indications are not investment advice. Statistics and other data may be from other sources and may be inaccurate or incomplete. See Full Disclaimer.

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