By Matthew BradbardCrude oil had been a one-sided trade since the start of April until the last few days, falling $12/barrel high to low. Bolstered by sellers who have called the commodity bull market dead, oil got dragged lower and struggled to find its footing until recently. But wait ... fast-forward to this week ... not only has crude oil recovered, most commodities have stabilized post-gold/silver shock.
Crude oil buyers found value in the mid $80s on the June contract. With a trade north of the 8-day MA (orange line) today, I think an interim low is likely in now. Off April 18th, futures have appreciated nearly 6% off the lows and are poised to take out the 38.2% Fib just about 40 cents above current trade.
I'm saying the risk on trade is back for a number of reasons:
- Metals found their footing after a feverish sell off
- Stocks are trading higher after quickly dismissing what seemed to be the start of a correction
- Energies are back on the move, higher
Equities and commodities appear to be in favor and the Treasury complex is starting to look heavy in my opinion. Let's see how this dynamic plays out in the coming weeks, but I'm calling a tradable low in crude oil, RBOB and heating oil.
A pure risk on trade, for speculators, is bullish crude exposure via long futures. That's my favored play. I will also be trading spreads and establishing upside hedges for clients.
Those willing to join the risk on party are advised to gain bullish exposure via long futures in June or July crude oil contracts and sell out-of-the-money calls 1:1. Use the Fibonacci levels on the chart above as your upside objectives. A 61.8% retracement puts June futures back above $94/barrel. Not a huge trade ... but enough room to pick up a few shekels - every $1 move in the standard crude contract equates to $1,000 gain/loss. Those selling out-of-the-money calls 1:1 against long futures should be willing to accept a loss on the options if crude trades higher, as we expect. But I'm fine giving up a portion of potential upside gains to have the hedge as a cushion if prices turn lower again.
As always, I'm here to discuss specifics and give guidance. Give me a call…
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.