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Whenever I am going to make an oil trade I strictly enforce the Valero (VLO) Rule:

You may hear a rumor or you may see a price spike or you may have information but you will never have anything on the guys who trade this stock!

The rule is very simple:

Do not take a long position when VLO is going down.

Do not take a short position when VLO is going up.

To confirm the Valero rule and make a trade I usually look at Exxon Mobil (XOM), a lagging indicator and the OGX, a middle indicator of the whole market and, of course, the actual price of oil.

When all of these factors are moving positive, I am confident buying - when moving negative, I will short with a vengeance.

When Valero changes direction, take your bets off the table!

The price action of Valero is like a window into oil arbitrage as the company, a massive refiner, buys oil on the spot market, adds value to it and then sells the refined products on the open market.

One look at the stock's appreciation over the years tells you not only are they good at their jobs but they also seem to get better and better at it each year.

How do they know? I don't know, I just know that after obsessing on this for over a year I now just accept the fact that they are much better at this than I am so I follow the Valero Rule pretty religiously. Whenever I make an oil trade or talk about one, I try to remember to say that it is subject to the Valero Rule, but now I will be able to point to this article rather than rehash the basics each time.

Source: Philip Davis' Valero Rule on Oil Stock Trading (VLO)