On the back of insurgent activity in Iraq, crude oil prices have popped up above recent highs. This isn’t something yet which breaks the long-running trading range I noted previously, but it is a development we need to keep an eye on moving forward. We can see why by first taking a look at the weekly chart below.
Notice how narrow the Bollinger Bands have become thanks to the relatively narrow range either side of about 102 seen over the months before the recent rally. As indicated by the lower plot on the graph, the Band Width reached its narrowest point in years, which by itself tells us to be on the lookout for a volatility expansion – most likely as part of a new trend. The oil rally above 105 is seeing the Bands start to widen out, which suggests that a volatility/range expansion has begun. The range being resolved positively is supported by the clear pattern of rising lows we can see going back to 2012.
That said, there’s definitely some resistance overtop at this stage. The market hasn’t been able to sustain moves above 108 at all since it peaked near 115 in 2011. And even if the market is able to overcome that resistance, the precipitous way oil sold off after making its 2008 high indicates the potential for resistance remaining a factor above 115.
Still, in the monthly time frame the Bollingers have turned higher and are very narrow. That paints a pretty positive picture for prices. A monthly close above 110 or so would probably get the Bands starting to widen out – a positive trend indication. If the Bands weren’t so narrow I’d suggest that we could actually see the kind of low volatility grind higher bullish trend that develops sometimes. With recent volatility so low, however, the odds would tend to favour at least some kind of short-term rapid range expansion before a trend settles in.