Three Ways to Trade the Black Stuff

December Light Sweet Crude is holding a bullish formation, and the daily chart reveals a potential $17 long move, if the global market stars align, says TheLFB's Chris Lewis. There is substantial support around the $77 area, and that is where a bullish flag has formed.

The ETF that covers the crude technical set-up, and offers leverage to play the move with no cost of carry (or delivery threats) is USO, or United States Oil Fund. The ETF links the same move, and allows a more affordable way of taking the oil trade.

As most new generation global traders understand, the above oil moves create money flows across borders, because of the supply and demand aspect that the technical chart reflects. As such, there is a third way to play the move, with the least amount of margin requirement, and that is via the spot currency markets.

The technical impact will show itself in a number of potential cross pair set-ups. For example, Canada is a major oil producer, while the U.S. and Japan are major consumers. The Japanese economy is particularly vulnerable to global commodity price moves, as it is an economy with no natural resources to tap, yet one of the world’s largest exporters of machinery, vehicles, and manufactured goods. The U.S. in a refiner of Canadian oil, and the supply and demand story will be seen in that pair as well.

When we review the currency charts, we have to accept that forex values are followers of global market drivers, and as such there will always be a delay in the impact in Usd/Cad and Usd/Jpy. As forex traders we will also have to wait for the day that oil breaks, and is backed by overall global trade holding $ values lower.

It is a matter of being aware of the interconnected market that will drive a currency, and waiting patiently for the fundamental and technical set up in the Forex market. This way, we have both a technical and fundamental reason for the move that will pay dividends in the long run.

We have the trade numbers on oil and on Cad (Usd/Cad) loaded as a signal, just gathering dust until the perfect storm hits, because when it does it will be a play that will very likely hold for some time. All we do now is wait and see if the set up comes to us.

In trade on Friday we can see the impact of oil moving lower (in a near-term move that tests the daily chart $77 support), while at the same time Usd/Cad has been the only major pair to move, hold, and start moving again. As oil finds a base, the intra-day signals will start to flash on Usd/Cad, and although not the only driver of C$ values, it is by far the easiest one to read and play.

As traders, we get paid to wait as much as we are paid to be involved, and in the hurry-up-and-wait world of global trade, patience is a virtue that most have a permanent short position in, and hold that position with no stop loss in place. A long-patience trade has a fear-of-loss premium, but the risk-to-reward is exponentially greater.

Disclosure: No Position

Comments

[Ferdinand E...:]

Oil at $80/b IS expensive, but this does not mean that Mad Hedge is wrong. Don't do the math - do the economics.

Nov 08 02:25 AM

[SeekingTruth:]

Don't forget, the new Toyota Prius line continues to improve and looks better and better.
If China, and others, clones this vehicle en mass, it will take "some" pressure off of oil demand .
General motors and others would have saved their companies with a similar vehicle instead of high priced gas guzzling mediocrity.
Other well discussed oil saving products are also in the works, but overall I agree with the tone and temper of the article and comments.
Still, we could do a lot, much more, to alleviate the pressure of future oil spike debacles if we had the national will to do so. But wait, that's socialism isn't it?
> Answer from Big Oil : "ABSOLUTELY YES", they say to the three little pigs.

We should go with what WORKS BEST consistent with our Constitution, and let the ideologues and special interests whine.

Nov 09 10:04 AM