To make money in oil, listen to prices more than news

Oil prices recently peaked and pulled back, but we have already taken action. I’ll describe what we did and show you the ETFs we used. It could be of use the next time around.

First, we recommended to clients who were long United States Oil Fund USO, -2.20% iPath S&P GSCI Crude Oil Total Return Index OIL, -3.12% ProShares Ultra Bloomberg Crude Oil UCO, -4.55% and other related oil ETFs that they take profits from their positions about two weeks ago.

This was not at the exact top for prices by any means, but we were close enough. The recent peak in West Texas Intermediate (WTI) crude CLZ7, -2.63%  was on Nov. 8, so our “sell” call was a little early but still profitable for those who bought under or near $50 a barrel. The peak was near $58.

We prefer to trade the two times long ETF, ProShares Ultra Bloomberg Crude Oil, for the long side. Conversely, we prefer to trade ProShares UltraShort Bloomberg Crude Oil SCO, +4.56% when we short. This makes it easier to short oil when we need to.

In between phases

However, a transition from long to short is not always immediate. Neither is a transition from short to long. Instead there is an in between phase; the transition usually involves a pause in between.

If you are a technician, this makes sense. Up-channels usually give way to neutral channels before down channels begin, and vice versa. Clearly this is not always true, but more than not transitions like this are normal, and valuable. When we are in cash, we can be objective again.

This is the key to trading oil from here on out.

Oil traders are somewhat lost because they seem to want to be bearish and still hate OPEC, but prices recovered aggressively from those early-year extreme bearish levels. The problem for many in the space lies in the method of observation.

Oil is a technical trade

Traders who are trying to use data, news and comments from the oil space to determine entry and exit levels are missing the key ingredient. Oil is a short-term traders instrument, it’s a futures contract that expires, and that means oil prices adhere to technical support and resistance levels most often.

This is not set in stone, and prices can be volatile, but it is much easier to trade the oil space based on the technical patterns than it is to try to decipher news properly. Many bearish oil traders were caught off guard during the latest run because of this.

Clearly, we recommended selling UCO a little early, but based on the patterns we observed when we were in the in between phase and objective, on Nov. 8 we also recommended that clients buy SCO. We recommended short oil positions from a technical peak, with a defined objective.

SCO was recommended at $27.7 eight days ago, and today we told clients to close that trade at about $29.1. The net return was over 5%. That compounded any gains from long oil positions that were closed out before too.

The tools we use to trade oil are UCO, SCO and the technicals.

Although this can change, the technicals currently show some support in WTI near $55, which is why we took profits. Now we are sitting patiently as we look for new opportunities objectively, again. This transition phase matters, and rarely does anything turn on a dime, so value this in between time greatly. Being objective matters in the oil space, and sometimes that means you need to stop listening to the noise and just respect price.

Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily. Kee managed the fourth-best-performing strategy in the world in 2016, according to HedgeCo.

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