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Oil has average about increased 20% increase from winter to summer in each of the past four years.
This January, Oklahoma Crude Oil was $54.11/barrel.
The XLE is at a technical crossroads, but will find support at current levels, offering option traders a very attractive entry point.

Crude Oil Trading: The Technical Crossroads

You knew this was coming… I alerted you last Friday, and you should have been able to protect yourself against this 4% drop. The past three days have seen oil dip from a high of $64.64 (using May futures) to today's low of $61.95.

This is the beginning of the downturn.

Now it's easy enough to tell you which direction oil is headed. We've gotten it right so far.

The hard part is telling you how far and when.

That job is even harder today.

We have had a pretty substantial drop over the past couple of days, and this momentum could push oil down to $60 a barrel over the next three weeks, but another key chart feature is interfering with this forecast.

The five-leg uptrend and the first leg of the downtrend (as evidenced in last week's futures chart) have created a support line that may become the bottom trend line of a long-term uptrend.

In other words, this recent downturn could be cut short.

Now we have two scenarios at this technical crossroads: The support line could provide a bounce at current levels, or the momentum from this three-day drop could push oil below the support line.

If oil prices do find support here, they may rise back to $64.64 before encountering resistance. If this recent high is breached, oil prices could climb to $66.78 by Memorial Day (at the latest).

The other scenario has oil prices dropping to $60 a barrel in three weeks.

This is a strong pennant formation (also a symmetrical triangle top). When the breakout comes, it will be definitive.

Here's how to play it…

If you've been using our XLE strategy (buying near-term calls when the XLE climbs 4% above its 50-day Moving Average, and buying near-term puts when it dips 4% below the 50-day), you're probably sitting on a very nice gain right now.

I'd take that gain no matter what.

I think the XLE will dip toward its 50-day MA from here, possibly back under our 4% threshold. If oil prices do find support for a bounce, the XLE could begin to climb again. Use the XLE strategy once the ETF gets beyond 4% above the 50-day.

If oil prices don't find support, and move back towards $60 a barrel, the XLE may drop down to its 50-day MA. Watch for a crossover, and keep our 4% threshold in mind.

Do not buy puts unless the XLE passes more than 4% below the 50-day MA.

There are too many things that can push oil prices higher this time of year, and you'd be wise to wait.

If you've used this strategy successfully, let me know how it treated you. Send me an email at e-news@taipanfinancialnews.com. Put “XLE Strategy” in the subject line.

Sara

Energy Investing: The current dip in oil prices is a gift. Open it now, because it won't last long

Sara has done an excellent write up on the XLE's relative support and resistance points. But all technical analysis can project is how interested the crowd will be in a particular asset with all given facts known.

In the case of a stock, barring a wonderful new contract or the CEO being indicted, those facts become known about once a quarter. With commodity-driven stocks like those of the XLE, the facts on the ground (or should we say in the ground?) are reassessed daily. And while we really can't “know” what the black stuff will cost over the next few weeks, we can at least look at the patterns of price growth over the past few years.

On the second week of January 2004, Cushing Crude was running at $33.89/barrel. By the second week in April, it was up to $35.70, and by July it was at $39.73 (nostalgic, eh?), offering us an average seasonal increase of 8.31% for that year.

Energy Investing: OK, oil may crest $72 a barrel by midsummer

Gang and average that figure for the past four years and you get around 10% per season. Apply that to this year, and mid-July ought to see oil over $68. However, this year is already proving exceptional, as we saw prices rise quite steeply between January and April. Apply that 15% rate of increase, and OK oil would be closer to $72/barrel.

Now that would be a shock indeed. But it is exceptional, and there is a good case to be made that we were simply seeing a steep early rise whose angle of attack may decline in the second quarter. Still, from the point of view of oil company profits, early spikes mean more oil sold at the higher prices and more profit in the bank by year's end, serving only to make these stocks even more attractive moving toward the next round of quarterly reports.

Referring back now to Sara's XLE study, I am inclined to believe that the index will find support at this level, offering readers utilizing her methodologies and my own WOW methodologies attractive entry prices for the XLE call options.

Adam

***

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.

Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.

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Related Resources
EIA: The last few years' crude prices in Oklahoma.
NYMEX: The current price in New York.
Quote: The latest on the XLE.