I get to blow my own horn a little here—regular readers of this blog know that I am always willing to confess my bad calls – so I like to think that this gives me the right to note when I am correct. Back in early February, after WTI crude put in its $44.50 low point, I noted that oil has NEVER put in a simple bottom after a significant crash. I suggested that a rally would likely occur off of that low point, followed by an eventual return to $45 or lower prices. This formation would be a classic bottom basing pattern – often known as a “Double Bottom” formation. http://www.valuetrend.ca/oil-is-setting-up/
The trick with trading off of any market bottom is to leave your pride, fear, greed and emotions at the door. We must follow some rules if we wish to trade the patterns of oil correctly. There are a few scenario’s that may play out over the coming weeks or months. Allow me to present a brief trading plan that I am considering, along with my entry & exit rules. Greater details on these trading rules can be seen in my book Sideways:
- WTI Oil might find support at current $45-ish price levels (the February low point), and successfully bounce –If this happens, wait for it to hold for 3+ days before entering a trade. I’d also like to see momentum oscillators hook up to confirm the trade—note the bearish near termed pattern at the time of writing (chart above). First resistance in the low $50’s may provide a short termed sell point. Let’s call that target about $53 or so. A failure to hold above $44.50 at any time will be a sell signal – limit your losses by stopping out below that point (wait 3 days to confirm it is not just a spike, and then sell).
- Oil may fall through $44.50 and find a low point near 2009’s low of $35-$40. Should crude find support there, look for it to hold for 3+ days, as noted above and consider entering into a position. I would look for a sell target first to $45, and then the low-$50’s.
- A break to the upside through $53-ish that lasts 3+ days will target $57, then $67. Keep your eyes open at those levels.
- Near-termed contract crude oil ETF’s such as DBO-US, USO-US and others may be appropriate for the early oil trade. We plan on legging into a trade in 3 stages, should oil find support at a level noted above. First will be an oil ETF, then an equity trade via either an individual stock or an energy ETF. Then a longer contract oil ETF such as Horizons Winter-contract HUC-TSX. By legging in over 3 stages, should the trade go wrong we will have avoided moving into the trade with too much capital.
- Our entry points will be: First leg on the 1st bounce (possibly off of $44.50 or the 2009 lows). Next leg upon the penetration of the next resistance level (depending on where the bottom bounce occurred). Then a final leg into a longer crude contract ETF, as markets dictate.
Good luck – it will be interesting to see how this trade plays out.