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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | JULY 22, 2004
Oil Prices: Ready to Sputter? [Page 2 of 2] Q: You also use the Bollinger Bands. [This tool, invented by John Bollinger, plots one band above and one band below a security price's moving average, typically the 30-day moving average. The bands are spaced at two standard deviations from the moving average. The area in between the bands is considered the normal, expected price range, while the area above or below the bands is considered extreme.] How do you use them and what have they told you? A: What most people use the Bollinger Bands for is as a short-term trading tool. More often than not, they use the 30-day or 21-day moving average because that covers a month. Whenever prices move, you get a quick surge in the bands. Many markets will drift sideways between those bands, and that's considered range trading. When you break out above the band, the market will stall, and it will move back to the range. But then what you're supposed to do is buy. It's an illustration that sentiment has turned one way and is going to continue to move that way. I prefer a different application. If you expand the application and look at the longer term, you see extremes in the marketplace. It does a reasonably good job of pointing them out. I like the 260-day moving average. It's much more rare to get to two standard deviations of the one-year moving average than it is of the one-month moving average. It's a fairly rare occurrence. The way to verify [the price pattern] is the Bollinger Bands. Whenever you get two tests of the band within a few months of each other -- it's very rare -- it increases the potential for a double top. It's flirting with the band for the second time within two or three months. Whenever that happens it's telling you, in my interpretation, that there's a high likelihood that a buying climax is being achieved and that we're going to get a sharp reversal. What it tells you is that on a breakout the market will slip back [the price will drop to inside the bands], but that there's some fairly strong buying. It doesn't tell you to buy when the price goes above the upper band, but it does tell you a strong enough buying surge is going on. It's telling you the market should settle back to the moving average. It's essentially saying: "Wait for the pullback." Q: What other valuations do you use? A: I take the crude oil and a very common relative valuation, the CRB index. You take the beta [a volatility measure] of a stock and its performance over some period of time. In this case, we are using beta of crude oil relative to the CRB index over three months. That's how you get an alpha [a measure of actual performance vs. expected performance]. You see whether crude oil has risen or fallen relative to its general index. Crude oil has been going up more than the commodities in the general index. The rally in metals and grains this year has pushed the CRB index into an uptrend. Crude has been a big part of that as well. There has been some overall strength in commodities in late 2003 and 2004. How low do you think oil prices could drop? A: What I'm most comfortable saying is that we'll get a drop back to $34. That is the midpoint of the Bollinger Bands. If the price breaks $34, there's likely to be a bear squeeze that will drop [crude oil] stocks down to the $28 range. If the price drops below $34, it triggers another wave of selling.
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