In on the oil trade

February 15, 201717 Comments

As readers know, I like to post some (not all, of course) of our strategic moves from the equity platform we manage at ValueTrend. I am asked at times if this is not “giving it away for free”, but I don’t look at it that way. As I’ve noted in the past, by showing people some (again – not all) of our trading decisions – you can get a taste for our style and if our decisions are good. There is no better advertising for an investment business, in my opinion, to better disclosure. Too many people in our business hide their performance and their strategies from the public. Or they only show you their good trades, after the fact. We, on the other hand, don’t mind displaying our wares on a live basis without post-trade filtration. With this in mind, let’s talk about our latest strategic move at ValueTrend.

 

We’ve been buying into oil and energy stocks lately. Our focus has been more on the oil services and junior oil stocks based on their chart patterns and their potential leverage (beta) against a positive move for oil. Seasonality is turning positive for the sector, and should be good out to the spring.

oil

Above is the longer view (weekly chart) for WTI. You’ll note that oil has cracked its neckline, although since doing so remains stuck below $55. A break through $55 will be bullish for WTI and likely move it into the low $60’s. While by itself not a bad trade, should that happen, it is my opinion that the juniors and the service companies will lever that move with a greater profit potential.

 

I’ve posted a weekly chart for the BMO Jr. oil ETF below (ZJO-T). We just bought a position in this ETF. I didn’t post a full study (moneyflow etc) give its relatively low volume – but it  is a good representative of the smaller energy stocks out there. We tore the index apart recently and liked the top 10 holdings (with the exception of Parsley Energy, PE-N). Thus, for diversification, we bought the ETF. In the oil services sector we bought two individual names (sorry, you have to be a client to know which ones…).

zjo

We view this as a seasonal trade at this juncture. Oil tends to be a good trade between February and May. Our commitment to holding oil much beyond the spring is low. Our price objective for WTI is to reach around $62 or so. This price objective is also fairly inflexible.  We plan on selling – ideally if/as/when the price objective and/or spring/early summer comes. A break much below $50 would inspire a sellout of the sector.

 

BTW–Brooke Thackray has a good summary of the seasonal oil trade on page 9 of his newest newsletter, here.

 

So there you have it. Our buy point, our upside objective, and our sell/loss strategy. Hopefully this will inspire some of you to think in terms of your trading strategies as you review this, or other opportunities.

 

17 Comments

  • HEARD ON CNBC LAST NIGHT, AN OIL ANALYST SAYING THAT IF U.S. STICK TO THEIR GOALS WITH FRACKING AND SHALE OIL, IT COULD DEPRESS OIL PRICE AND OPEC COUNTRIES WOULD NOT RESPECT THEIR QUOTAS AS THEY DID RECENTLY, SINCE THEIR MAIN STREAM OF REVENUES ARE OIL RELATED . (ANY COMMENT?)

    Reply
    • Every announcement and development provides opportunity to change the landscape – however, I have a relatively tight trading plan based on a 3 month window and price objective–along with a sell strategy should such an event occur. And that’s all you can do on ANY trade, JP.
      Thanks for that–it is good you brought it up as a point to keep in mind for the oil trade – and for that matter, any trade (ie things can change–have an exit plan!).

      Reply
  • tu for your input…….do you have any concerns re a possible Trump border tax on Canadian energy?

    Reply
    • I am, for sure. That’s why we put half of our exposure into the oil service sector–who often do business worldwide.

      Reply
  • Thanks for the assistance Keith, wonderful article. I have been keeping my eye on Ensign Energy Services foe just such a trade.

    Reply
  • Keith, I like that ZJO chart. Thank you for sharing.
    However, volume is so low on this ETF. I am surprised it’s liquid enough for your accounts!

    Reply
    • We go right to the market maker –something you can do when you are trading a few million dollars.

      Reply
      • So when you buy via BMO directly are your trades basically hidden from retail investors so we can’t see high trading volumes?

        Reply
        • No they are not hidden–they usually cross the floor as a block trade ( I think we did about $4MM of that ETF that day).

          Reply
  • Hi Keith , on somewhat related subject , what do you think about VIX’s recent rise ? On Wednesday, the VIX jumped 11%, climbing even as markets were rallying. On Thursday, climbed again, jumped nearly 19% over a two-session period . What this means ? Is it more protection buying in case of pull back/correction ? How do you play this ? More cash , reverse ETFs ?

    Reply
    • It is certainly unusual. I cant say I have done studies on a VIX divergence so I don’t know that it is a bearish sign for sure – but I can say that its an unusual occurrence, and that alone suggests a change of some sort. The third week of Feb is often shaky–so that VIX move could be in anticipation of a short correction next week (?)

      Reply
  • Yeah , l notice this divergence in few other Etfs in the past, for some reason they don’t act according to they makeup. HOU , double oil bear is famous for that

    Reply
  • “COMMERCIAL TRADERS OF CRUDE OIL FUTURES ADDED TO ALL TIME NET SHORT POSITION SET TWO WEEKS AGO. BIGGER THAN JUNE 2014 BEFORE 58% PRICE DROP”.

    -TOM MCLELLAN’S COMMENT ON TWITTER (18/02/2017)

    Reply
  • Hi again Keith,

    Today, Monday February 21st, Natural Gas fell an impressive 9%. That commodity sure is volatile! I’m not sure you care to comment, but the two Canadian large cap stocks most exposed to it (PEY and TOU) have only gone down 1.0 – 1.6%. I usually don’t care for fundamentals, but this is surprising enough that I was curious what you thought.

    Certainly, I will be staying on sidelines and be patient waiting for a turn in Canadian ETF HUN.

    Thanks
    Matt

    Reply
    • There is a Nat Gas seasonal ccyle from mid march to mid June. Perhaps that might be a good window to watch
      As far as equities–yes, they can lag -or upside lever movements in energy–just the same as with gold or materials. I think it all comes down to the commercial hedges they have on their product, the cycle of production, labor costs, etc

      Reply
  • Hi Keith,

    I really enjoyed your “In on the oil trade” article. I have been nibbling at the HEU leveraged ETF
    for a short term trade on the basis that the S&P/TSX Capped Energy Index recently broke a
    downtrend resistance line and stayed above the 200 line on the daily charts for a few days. Also, I have been watching the $WTIC inch its way over one of the resistance lines to close its highest at $54.33 on February the 21st. Of course, today (the 22nd) with a long red candle stick for HEU it makes me second guess myself! Given that oil prices have recovered in after hour trading possibly the sell off won’t be followed by a second long candlestick tomorrow.

    I am interested (if you ever care to comment) on your buying strategy for entering a position. For example do you buy all at one time or do you scale into positions. The ZJO you referred to is still trading below the 20 and 50 line (daily) that are both pointing downwards and it has yet to break the downward sloping resistance line. It does seem to have support at around $16.28. I would be very interested to know what strategy you would teach to enter your full position in ZJO. I think the strategy of entering your position is as important as the underlying technical analysis but it is rarely discussed by anyone in detail.

    Regards,

    James

    PS., Do you have plans to release any of your books electronically. I was thinking of buying the paperback “Smartbounce” as a starter.

    Reply
    • Thanks for the comment James. In a nutshell: I usually enter each individual trade all at once, but I take multiple positions within a sector–so I will buy these individual securities in stages as a strategy for “legging in”. Similarly–Sometimes we exit in stages, unless it is an obvious sell signal, which means we just dump and run. My basic rules–which are explained in the book Sideways, are to look for either a test of a trendline in an uptrend OR a breakout of a base after a downtrend is broken. I do this by identifying peaks and troughs on the weekly chart. Oil looks like a base breakout–it did take the last high out, and its above the 40 week (200 day) MA. I pay less attention to shorter MA’s. I tend to look for seasonal plays that meet this peak and MA rule criteria–which oil does right now. More detail on the methods I use are in the book Sideways – which I would recommend you read, given that it appears you are reasonably adept at understanding Technical Analysis.

      Reply

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