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…
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.
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.
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