Whether it’s heading up or down, the oil market usually asserts itself as the leader of the commodities world.
Having plunged from levels around $130 per barrel this time last year all the way down to the $40s, the market has spent the last couple of months striking to the upside again.
As I’ve mentioned in recent issues, oil had near-term targets of $70 in its sights. It hasn’t disappointed, shooting past the $73 mark late last week - a level not seen since the first week of November 2008.
On a technical basis, because oil has not only moved above, but also stayed above all the major moving averages (including the all-important 200-day average), it’s now got $80 in its sights. If any pullback is going to occur, which should happen after solid runs like this, the move down should hold at the $65 per barrel range.
On a fundamental note, we’ve got three reasons for the recent price rise…
- Hedge funds seem to be pumping more money into the market again.
- OPEC has decreased oil supply levels.
- There seems to be some consensus that oil demand might be picking up from the slack levels seen over the past six months.
For now, the market looks strong and any pullbacks should be met with more buying. Here’s how you can play it…
How To Play Oil With Minimum Fuss
The chart below shows the daily movements of the front-month futures contract (July)…
The easiest way to play the broad oil market (either to the upside or downside) is to go for the very popular and highly liquid exchange traded fund, United States Oil (NYSE: USO). The fund mimics the moves of crude oil futures that trade on the NYMEX.
You can trade USO like a normal stock in a regular stock brokerage account and the ETF has options contracts available, too.
Since we first went bullish on oil, USO traded around $32. It’s now around $38.80 and is a very effective “cheaper” alternative to the high-priced arena of futures and futures options, while still profiting from the same moves as the underlying oil market.
Natural Gas Making Unnatural Moves
Having been stuck in the doldrums for ages, the natural gas market has really woken up recently.
Prices have coiled into a narrow trading range over the past two weeks, with volatile swings of 300-400 points over just a few days becoming the norm. At the moment, it looks like the $3.50 per MMB/tu level is the floor, while the market tries to decide which way it eventually wants to go.
Keep Tabs On The 20-Day Moving Average For Clues To The Next Move
With natural gas prices still sitting near multi-year lows, we continue to have a bullish longer-term perspective.
Also, I’ll reiterate a technical observation from my last issue: Because the 20-day moving average has crossed above the 50-day moving average for the first time since July 2008, this usually leads to a change in direction.
However, as volatile as natural gas is, the 20-day MA is flirting with crossing back underneath the 50-day MA, unless natural gas can muster a convincing move above the $4.000 per MMB/tu level.
We still like natural gas on the long side, but be patient here. This is a real, in-demand natural resource commodity, so it never has the worry factor of going out of business or bankrupt.
You can participate in this market by using the equivalent ETF for natural gas - United States Natural Gas (NYSE: UNG), which reacts just like the futures and futures options do. If you’re considering bullish strategies, UNG offers options contracts as well.
When Inflation Hits, You Want To Be Invested Here
The financials markets and investing can be a highly divisive subject… but most people agree on one thing:
Interest rates and inflation will rise eventually (in fact, rates have already started to rise), while the U.S. dollar will fall. This will be in response to the huge debt that the American government is getting itself into, due to the financial crisis and bailout programs.
Scenarios like this have always led to bullish moves into commodities, as they can buffer the effects just mentioned above. Witness the bullish moves in virtually every commodity sector that began in earnest a few months ago.
One of the best places to be in order to protect yourself from inflation is the metals markets. In fact, gold and silver have fared exceptionally well since the end of 2008 - and haven’t looked back since.
Our technical levels have served us well, allowing us to spot the support areas for both metals - gold near the $880 per ounce level, while solid support for silver comes in at $12.000 per ounce. Both have bounced from those areas and have enjoyed strong moves.
Although both metals are currently seeing slight pullbacks, they should resume their upward marches toward $1,000 and $20 for gold and silver respectively.
You can trade gold and silver directly through the futures options that trade on the NYMEX. Or if you prefer regular stock and options-based plays, check out their respective ETFs - the SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV).
Editor, Triple-Zone Profit Trader
Disclosure: No positions