Investing in Oil: What a Move in Crude
By S.R. Nunnally
In this article
Long candlesticks show just how large the gap is between the high price of the day and the low price of the day.
Of these 55 trading days, 45 have shown oil price movement in excess of 2%.
For the big picture, we're now looking at a somewhat firm consolidation period through spring.
Investing in Oil: What a Move in Crude
What a move in crude oil prices today: more than a 2% jump! I wish I could say this was an unusual event, but it's not.
The daily price movements of crude have been pretty volatile. Long candlesticks show just how large the gap is between the high price of the day and the low price of the day.
In fact, to show you just how usual this type of movement is, I counted the number of days since the start of 2007 where oil prices moved more than 2% (I'm using May futures for this count, and I'm using high and low prices rather than open and close prices).
Today is the 55th trading day of 2007. Of these 55 days, 45 have shown price movement in excess of 2%. Only 10 have shown less than 2%.
There is something unusual, though. The number of days where oil showed less than 2% movement is becoming more frequent. January only had one day when oil prices didn't move 2% between their high and low price. February had two days.
March has seven days so far, with three of those days coming just before today's 2%-plus price move.
Investing in Oil: Highly Unstable
What does this action tell us?
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Well, it tells us that in the beginning of the year, the price of oil was highly unstable, and that perhaps the huge correction we saw was overly dramatic.
It also tells us that the higher oil prices climb, the less volatile the daily price movements become. We can infer from the lower fluctuations that traders are comfortable with oil prices between $60 and $64 (according to May futures prices).
So for the big picture, we're now looking at a somewhat firm consolidation period through spring, with prices fluctuating between $60 and $64.
Heading into summer, those prices will provide a strong base to move higher.
If that's the case, we could be looking at oil in the low- to mid-$70s throughout the summer months.
Additionally, today's action starts leg two of the three-leg downturn, if you follow the Elliot Wave Theory. That said, it's possible we could see oil drop as low as $58-60 a barrel, depending on how high this rise takes us.
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Investing in Oil: The 50-day Moving Average Strategy
Let's see how this little rally in oil is treating oil stocks and ETFs… Remember the 50-day Moving Average strategy with the XLE?
Today's action has taken the XLE up to $59.90, a continuation of yesterday's pop. The 50-day MA rests at about $57.17. The XLE is now 4.77% above its Moving Average.
If you recall, we determined that the XLE should move 4% above or below the MA before playing put or call options.
We have that now. According to our average rise above the 4% move, we're looking at a further 5.7%.
Now would be the time to play some short-term calls.
(By the way, when I spoke to you about this strategy on March 12, I told you the “average net rise for four times the ETF has dipped more than 4% below the MA at 9.31%.” That should have read “average net fall.” Thanks to the Market Report reader who caught my mistake.)
And remember, the name of the game is, “Make gains, take gains.”
Good luck!
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S.R. Nunnally is a commodities expert and technical analyst for Taipan Financial News. She is the editor of Material Profits, a monthly newsletter providing in-depth, cutting-edge research in the commodities sector. She is also the founder of Material Profits Wildcatter, employing an elite group of aggressive investment strategies.
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Related Resources
Energy Stocks: Oil stocks extend gains on 3% jump in crude price. - MarketWatch.com
XLE Chart: Chart showing the 50-day Moving Average. - Yahoo!Finance.com
Crude Oil: May futures price chart showing 45 +2% price movements. - BarChart.com