Bullish On Oil Stock, A Knee Jerk Reaction Triggered By Mid-East Turmoil

by: John Thiel

If you have been monitoring financial updates and trying to get a feel for the markets, you probably noticed certain cyclical events that have triggered market fluctuations.

Let's take the Middle East for example, every now and then skirmishes between Israelis and Palestinians send the whole region into a panic state. Someone who is aware of these cyclical events and how the markets react will know that the market's almost Pavlovian reaction to the tension in that part of the world is manifested in the immediate increase of oil prices.

In trading, anything predictable is good. So if you follow the news you would also understand that this is a great opportunity to dump your oil stock on the up side because it's bound to regress towards the average when the fighting subsides.

Since I own some Chevron (NYSE:CVX), Exxon (NYSE:XOM), and BP (NYSE:BP) I decided I wanted sell some of my oil stock (not more than 10%) on the upside, and buy it back when the prices fluctuate back to normal.

I actually did that and was extremely successful this time. By risking 10% of my energy stock portfolio I was able to make a significant ROI just by understanding the market and leveraging my stock to generate more Return.

To prove my point, the chart below outlines Brent Crude Oil price fluctuations during the start of the recent skirmish between Israelis and Palestinians on November 14th, and then a regression towards the average followed by an additional upward momentum.

Click to enlarge
(Click to enlarge)

There are two possible exit points, the first on November 15th and the second on the 20th. I sold my stock on the 15th and bought it again the next day on the downside making a considerable sum.

I have done this previously with other stock I own, using the same tactics, and I usually come out on top. On the candle charts you recognize the hammer immediately if you have been doing this long enough.

The last time I traded the news it was with wheat and grain stock. I understood that the drought has taken its toll so I started selling bushels. Eventually the prices regressed towards the average and I was able to make a killing.

Generally speaking, trading the news and looking for cyclical and predictable patterns is an acquired skill everyone can gain. It's a good way to get into the stock market even if you have no prior experience and would like to start investing.

The main risks involved are lack of experience, which means you are making the wrong assumptions based on the news, and obviously not exiting the position during the right time. However, if you have a feel for the markets and know how to read the charts you can me significant gains in very short periods of time.

In general I find oil stock to be a crucial component of the investment portfolio because it consistently performs in the long term. I usually have long holds on my XOM and CVX stock, but I'm also open and receptive to new money-making opportunities as they present themselves. I will never risk more than 10% of my oil stock, and believe there will be a sudden transition from oil to gas and clean energy markets. I am constantly looking for this pivot point and the companies that develop clean or sustainable energy sources.

Disclosure: I am long XOM, CVX, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.