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Tales of a Technician: How ‘Bout that Oil Breakout!?

June 1, 2021

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If you’re a chart-loving trader like yours truly, then the only headline that matters today is that oil prices are breaking out. By topping $67, Light Sweet Crude Oil Futures are officially clearing their two+ month trading range and signaling the next up-leg has begun.

When looking at the weekly view, the $67 zone becomes even more important. It played resistance throughout 2019 and before the pandemic plunge in 2020. What do you think it means when prices can break a level that was heretofore unbreakable over the past half a dozen attempts?

It sure isn’t bearish.

If you’re wondering where oil goes next, then look no further than $75. It’s the next logical level on the weekly chart and should act as a magnet. This doesn’t mean we have to move there in a straight line, mind you. But the nature of an uptrending asset is to power through to the next ceiling after blasting through the last one.

The Energy Complex

Energy stocks are responding with as much vigor as you’d expect. In some instances, they’re likely surprising you by the magnitude of their gains. The following five stocks are up over 9%: OXY, APA, DVN, MRO, RRC.

Fortunately, there’s no shortage of vehicles available to play the ascent. You could go with the gunslingers above or their more stable companions like XOM, CVX, and COP.

Those looking for a broader, more diversified route might opt for the host of energy-based Exchange Traded Funds like XLE, XOP, and OIH.

Because we’ve been in a rising tide environment, it hasn’t much mattered what your vehicle has been – provided you picked one! On a similar note, it also hasn’t really mattered which strategy you’ve used. Long stock, bull calls, naked puts, covered calls – you name it. The lot of them have all delivered profits provided you had decent entry points and patience.

XLE Case Study

Let’s look at an example of how someone may have built a trade using the Energy Sector ETF (XLE), which jumped 3.89% today.

The price is in an uptrend above all major moving averages. At the same time, implied volatility is in the dumps at the 3rd percentile of its one-year range. That tells me I want to be a BUYER of options.

To increase my probability of profit, I will build a strategy that profits in a +1 environment. Were I to buy calls outright (a +3 strategy), then XLE would need to rise quite a bit to garner a good profit.

The Trade: Buy the Aug $50 call while selling the 2 July $56 call for a net debit of $4.50.

Here’s the risk graph.

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