The Rise of the Other Gold...Black Gold

Crude Oil, or what many call Black Gold, has recently experienced a very bullish move from the low 70s to the low 80s. Several things make this advance very special. As a result, I’m looking for much higher prices as we move deeper into 2010.

Let’s take a more detailed look at why Crude Oil’s recent actively has caught my fancy.

1) Higher Low - The low ($71) from which this most recent rally began is higher than the low ($67) from which the previous rally started. This one fact tells me that the odds of the prior high resistance around $83 being taken out are very good. The question is, does this heavy area of resistance get surpassed now, or does a pullback occur first? Quite frankly, I’d prefer a pullback first. This would allow for getting in at a more favorable price and it would make for entering after a rest, not after an already prolonged multi-week rally. The circle on the chart shows the area I’d love for oil to pullback to.

2) Congestion Cleared - While the former high of just below $83 is potential resistance, what can also cause some trouble are major pockets of sloppy price congestion. Look at oil during the entire month of November. Note the sloppy back and forth price action between $77 and $82. This choppy consolidated price area can be looked at as a major traffic jam. They often halt rallies dead in their tracks for a while, once they are revisited. But as you can clearly see, Crude seared through this congestion as if it did not even exist. This is very bullish and signifies how powerful the momentum is behind the move.

3) Steady & Controlled – Lastly, the advance, while powerful, is still quite calm. No major jolts and rips. Now “wow” moves up or down. Just steady, calm, almost quiet power. It's these types of controlled moves that can go on for a very long time. The wild ones don’t last. They spend most of the energy on sudden bursts and explosions, then peter out quite early. The calm, steady ones that rise without much fanfare on any given day, they last. That is what we have here. It’s the old story of the hare and the tortoise. Steady wins the race.

My Strategy
I will be looking to buy oil on a pullback toward its 20-period moving average (20ma). This pullback, if it got there, would represent something close to a 50% retracement, which is perfect. The market has a tendency to take two steps forward and one step back. If it rallies $10, it is normal to see $5 pullbacks. Now, I am mindful that a decent pullback may not occur, so I will also look to nibble on a break above $83 should that happen first; however, I won’t buy as heavily on the breakout as I will on a pullback. What type of move over time am I expecting? Well, I think oil goes to $100 with relative ease. How it handles the $100 will give further clues, but I will cross that bridge if and when it gets there. Let’s see what happens.

While I will use the futures market to play the bulk of my position in oil, there are a few ETFs and ETNs that can be used to capture oil’s potential move. Below I have provided two that mirror oil’s action quite nicely.

While Oil Futures have come all the way up to its prior high, United State Oil Fund (USO) has not quite accomplished that, but its pattern is very similar to that of the oil chart above. The breakout for USO will be above $42, but as you already know, I’d love a pullback to occur first. The circle shows where I’d like to see that pullback reach. Note the three gaps USO formed on the way up over the past few weeks. It’s the middle gap that I want to get filled on a pullback. Will that happen? Who knows? I’m simply expressing what I’d like to see. The filling of that gap would simultaneously accomplish a retest of the 20ma, also. That's wonderful! Again, all I can do is wait to see what happens.

Crude Oil total Return (OIL) is an ETN that pretty much mimics Crude Oil tit-for-tat. Notice how identical this chart is to that of USO. It’s the same; same pattern, same gaps, same everything. I include it here because sometimes a lower priced item allows for a bigger share position, which can at times be a good thing. Again, while there is no circle on this chart, I’d love to see a pullback to the $25 area which would fill the middle gap and retest the 20ma at the same time.

Other Black Gold Gems
I won’t post the charts, but there are several other oil related items I really like. Take a look at them at your leisure and see if any of them catch your fancy.

Deutsche Bank Ag London Brh (OLO) tracks oil pretty well, but has some extra kick because it seeks to offer exposure to the monthly T-Bill index as well as the monthly performance of the DB Optimum Yield Crude Oil index. It’s thin, but that is of little consequence when trading ECN like vehicles.

Occidental Petroleum (OXY) – This is a real company. When I say real, I mean “real.” No hype, no games, no stories. And I like its chart as of late. I think this baby might go soon and will be keeping an eye on it. Besides offering exposure to oil, OXY also deals in gas and chemicals, offering some commodity related diversification. That is why its chart is not quite the same as those which just offer exposure to oil.

Linn Energy (LINE) already broke out above the $25.50 area, which was my first notice, but the shares of this Russian oil company could see much higher prices if oil does breakout and run toward the $100 mark. I will continue to keep a close eye on all of these.