As our research expands to cover oil and develop an algorithm that can predict the future price of oil, here’s new data for us to analyze.

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First we look at oil inventories versus the stock market:

Oil Inventory Data

Next, we look at oil inventories versus oil price.  They say supply and demand are critical – and this shows the supply component.  Note we do not strip out the strategic petroleum reserve from this data as it remains relatively constant.

Oil Inventories

There are periods of direct correlation in the data and there are periods where directional movement either leads or lags.  Our leading indicator is bullish for oil.  And volatility remains low, and a potential concern if it breaks.  But there are no signs of that yet.

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Good morning Traders,

Let’s take a look at our oil leading indicator:

 Oil USO Leading Indicator

We have been looking for oil to move lower, and we were very frustrated by the large move lower at the end of last week not giving us a chance to load up on PUTS.  The question here is will the selling continue or are we done.

Let’s take a look at oil Sentiment:

 USO OIL Sentiment

Based on this, I would expect more selling as OIL Option traders are still very bullish – and when the crowd leans to the right, we want to lean to the left on a contrarian basis.

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You’ll also note that oil seasonality normally starts off the year weak into the end of June. 

So on the timing, we’re looking at an options expiration next Friday, and dollar reversing this am and the stock market bouncing which would tend to support oil.  So I still think we have a chance to jump into some OIL PUTS – but not yet…

So stay tuned…

Regards,

www.stockbarometer.com

As a market timer, I’m always trying to predict The Future Price Of Oil so I can set up some longer term portfolio positions, usually using the USO, or pot or call options on the USO, or some of the derivative ETFs, like UCO and DTO, which give you 2x leverage.

So while those are vehicles you can use to trade the future price of oil.  How do you determine what oil is going to do in the future?

As a contrarian, I believe how people bet their money is the ultimate tell on the future price of oil.  Meaning, when traders are too optimistic or bullish, prices tend to go lower, and when traders are too bearish, or pessimistic, prices tend to go higher.

Accordingly, I keep track of oil options activity including open interest.  This tells me how traders are positioning.  And I’m always looking for extremes.

Secondary, you have to watch the dollar, since oil is priced in US Dollars (for the most part) – the price of the dollar makes oil either cheaper or more expensive.  So a dollar bounce, makes oil more expensive, and drives demand lower.  And vice versa, the dollar dropping is bullish for oil – as it makes it cheaper.

This creates some normal fluctuation in price movement for oil.

What about oil shocks?  Briefly put, the market is both efficient and adaptive – meaning it’s random to an extent, and subject to shocks, but adaptive in that shocks may be shortlived as the market adapts to the new environment.

So speaking in terms of right now, I am bearish on oil, because so many are bullish.  I also see the dollar rallying here, and that rally will continue to weaken oil.

Timing?  Well as far as timing goes, my current call (as of 1/30/12) is for oil to head lower into later February.  I do have an indicator that I use to predict the future price of oil.  Here it is:

future price of oil

future price of oil

While I can’t share with you how I develop it (anchient chinese secret) I can say that periodically it’s right on.

If you want to follow along with all my predictions for the stock market, the future price of oil, bonds, dollar and gold, you can sign up for a trial of my Daily Stock Barometer at www.stockbarometer.com

Or if you just want to get periodic ramblings from me, sign up for my weekly market updates here:  http://www.mailermailer.com/x?oid=20628s

How can knowing the future price of oil help the average person?  Well, I like many of you use oil to heat my home.  When I get near the lows in my oil tank, within a month or so, I pay close attention to where oil is and where it is going.  You can save a significant amount of money over time just by using a little ‘market timing’ when you make your choice when to buy…

Regards,

Stock Barometer

Investment Research Group, Inc.