Last week Saudi Arabia, Venezuela, Qatar, and Russia agreed to cap oil production at mid-January levels. The pact aims to halt the fall in oil prices that has wreaked havoc around the world.
The news of the deal sparked some optimism – you can see on the chart below that markets pushed oil up leading into the agreement from its mid-February low point of around $27 to a close just below $33 last week. An inverted hammer on Friday shows you that the enthusiasm quickly faded as reality began to set in: the deal will not take a single barrel off the market.
I was asked by a few readers of my opinion on oil right now. The beauty of technical analysis is that you don’t need an opinion–you need only follow the trend. The chart shows us clearly that oil has been consolidating since the beginning of this year. Near termed resistance sits around $34 – $35- the market is currently testing or close to testing that lid. Oil is well away from its longer termed downtrend line—something that must be respected. It’s in a downtrend.
Oil is consolidating within its longer termed downtrend – that’s not an opinion – that’s a fact. And thats a risky pattern for intermediate termed (multi weeks to months) traders like myself to get involved in. Oil could breakout on either side of this near termed consolidation. I’m inclined to consider a small long position if and only if WTI breaks $35 by about 3% (lets say a dollar–to around $36). I’ll wait at least 3 days to confirm the break, and begin to leg in with a “half” position at that time. I’d take a more serious position if as when those conditions occur, along with an upside break through the 200 day (40 week, 10 month) MA. In its favor are seasonal tendencies. Oil tends to have a better chance of moving between now and the spring. So keep an eye on this potential.
BTW – people have asked me what a my position sizing rules are. Simply put, based on confidence in our assessment of the play, we buy into a minimum position of 3% (half), a neutral position at 5-6%, and a maximum position of 10%. We can, and have, bought up to a maximum of 30% in a sector if we are really bullish – but that will be diversified through various individual plays within the sector. For example, we may buy a position in a direct oil play ETF like USO, then leg into an energy orientated equity ETF, followed by a couple of individual stocks to hit that 30% maximum exposure. But thats only when we have a far above average confidence level on the sector. You can read more about the disciplined entry & exit approach I’m noting here by reading my book Sideways.