CRUDE OIL BREAKS OUT TO SUPPORT BREAKOUT IN ENERGY STOCKS -- WIDENING BOLLINGER BAND WIDTH IS BULLISH FOR OIL
CRUDE OIL HITS NEW RECOVERY HIGH... Earlier today I wrote about the bullish breakout in the energy sector. That strong action in energy stocks was confirmed by equally bullish action in the commodity. Crude oil surged over 5% today to reach the highest level in nearly two months. Crude appears headed for a test of its 2005 high near $58. Last night I wrote about how a narrowing in the width of the two Bollinger bands suggested that a market (like the Nasdaq) had put in a short-term peak and was in the midst of a pullback or consolidation. A widening of the band width usually signals the beginning of a new trend. That's the case with oil.
Chart 1
WIDENING BAND WIDTH IS BULLISH FOR OIL ... Chart 1 applies Bollinger bands to the daily chart of crude oil. Those bands are plotted two standard deviations around the dashed middle line which is the 20-day moving average. If you look at the bands, you'll see that they don't stay at a constant width. The distance between the two outer bands contracts and expands. Since the start of June, for example, the difference between the two bands has widened. That's because the upper band is rising while the lower band is falling. The easiest way to track the difference between the two bands is by charting the Bollinger Band Width. That's the solid line shown under Chart 1. [Bollinger Band Width can be found at the bottom of the list under Indicator Windows]. Notice that the band width started to narrow in early March just as oil was starting a downside correction. A peak in band width normally signals that the existing trend in a market (either up or down) is in need of correction or consolidation. It's a good short-term signal to take some profits. When the band width starts to rise (as it did in late May), that's a sign that the period of consolidation or correction is over and the market is ready to start another run. The fact that crude rose above its 20-day average in late May told us that the next run would be to the upside.
