The energy sector has surged during the last two months which can be seen
by looking at the XLE Energy Select Sector Fund. If crude oil continues to
climb to the $112 level, XLE will likely continue to rally for another few
days or possibly week as energy stocks are considered a leveraged way to play
energy price movements.
Another way to look at this info is through the USO United States Oil Fund.
This tracks much closer to the price of oil. The only issue is that many ETFs
that "try to track" an underlying commodity is in how the funds are built.
They own multiple contracts further into the future which does not exactly
provide us with the short term news/event driven price movements in the current
front month contract as they should.
What does this mumbo jumbo mean? Well, it means funds like USO and the highly
respected UNG, and VIX ETFs... (just joking about the highly respected part),
fail to track the underlying commodity or index very well when it comes to
short term price movements. This means, you can nail the timing of a trade,
and the commodity or index will move in your favor, yet your fund loses money,
or goes nowhere...
Let's Focus on the Technicals Now...
WTI crude oil has formed a bullish ascending triangle pattern from March to
May of this year. The breakout to the upside is bullish and should be traded
that way until the chart says otherwise. This breakout and first pullback must
hold, or I will consider it a failed breakout. So if price dips and closes
2 days below the breakout level, it will be a major negative for oil in my
opinion.
The range of the ascending triangle provides us with a measured move to the
upside which is $112. Typically the first pullback after a breakout can be
bought. The first short term target to scalp some gains would be $109, and
at that point moving your stop to breakeven is a wise decision. Trading is
all about managing capital and risk, if you don't, then the market will take
advantage of your lack in discipline.
Looking further back on the chart, you can see the double bottom formation
also known as a "W" formation. Once the high of the "W" formation is broken
the trend should be considered neural or up.
Also note that the RSI (relative strength) has been trending higher for some
time now. This means money is rotating into this commodity. This is in line
with my
interview this week with Kerry Lutz and my recent article talking about the
next bull market in commodities and the TSX (Toronto Stock Exchange).
WTI Crude Oil Trading Conclusion:
In short, oil has some extra risk around it. The recent move has been partly
fueled by news overseas. So at any time oil could get a lift or take a hit
by news that hits the wires. I tent to trade news related events with much
less capital than I normally do because of this risk.
Happy Trading!
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