Crude Oil Prices: Largest Two-day Drop in a Month
By S.R. Nunnally
In this article
Today, oil fell as far as $58.60, making the last two trading days the largest two-day drop since January 10 and 11.
It is possible for oil to trend back down to $57.50 - the last point where it found strong support.
Recent volatility in the XLE has shown that trading options based on the 50-day MA is a bit hairy. Here's how to manage the situation…
The big story today is oil's continuing drop. On Friday, March 9, oil fell from $61.71 to $60.05. Today, oil fell as far as $58.60, making the last two trading days the largest two-day drop since January 10 and 11.
When I spoke to you about oil prices last Thursday, I talked about the Elliot Wave theory. Indeed, this theory has held true, as oil prices climbed as high as $62.30 before beginning their recent two-day descent.
The second part of the pattern is a three-leg downturn. We're already seeing the first leg. The next two days will continue this downturn, but I think we're likely to see a much smaller daily trading range. It is possible for oil to trend back down to $57.50 -- the last point where it found strong support.
From there, you may expect to see oil climb back to the $60 level to make the second leg of the wave.
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The third leg could put oil back down near in the low $50s, but it won't stay there for long. By then, we'll be heading into summer, and oil prices will be heading higher.
Crude Oil Prices: Leveraging Your Long-term Portfolio
I also talked about playing options on the ETFs to leverage or hedge your long-term oil portfolio.
The XLE is currently over its 50-day Moving Average. That would be a sign to play calls on the ETF, but falling oil prices do not confirm this move.
In fact, recent volatility in the ETF has shown that trading options based on the 50-day MA is a bit hairy.
Here's how to manage the situation…
In the past year, the XLE has oscillated above the MA 11 times. In only four of those times has the XLE continued that move significantly higher before dipping back below the 50-day MA.
Conversely, the XLE has fallen below the MA 12 times, with only four instances that dropped the ETF significantly lower.
In each case, however, once the ETF moves 4% away from the 50-day Moving Average, it has continued moving in that direction. The four times the XLE has moved 4% above the 50-day MA, the move averaged a net rise of 5.7%. (That's 5.7% after the 4% rise above the 50-day MA.)
The average net rise for the four times the ETF has dipped more than 4% below the MA is 9.31%.
Stall your options plays until the ETF moves 4% above or below the 50-day Moving Average, and that will help eliminate some of the excess volatility.
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Related Resources
Bloomberg Interview: Oil Downtrend - Bloomberg
Oil Futures: Futures charts for commodities, currencies, and more. - Barchart.com
XLE Chart: A one-year chart of the XLE with its 50-day Moving Average. - Yahoo!Finance