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Oil set for correction… how should you play it?

 Crude oil has had quite a run over the past six months.  And with it, a great run for the oil refiners too. Valero (VLO) up 40%. Tesoro (TSO) up 75%. Frontier Oil (FTO) up 45%. Sunoco (SUN) up 28% – all over the past half year.

Since July, many oil related plays have been doing well. But in my opinion oil is now due for a pull back. Usually crude oil trades inversely to the dollar. But a look at the 3m and 6m comparison between Oil and USD shows that they have been trading up together. Since November the US Dollar has been on a tear back up, largely due to fears of a European meltdown, and troubles in the Koreas.  The dollar is now in bullish consolidation after a run up into December, and the USD index could even make its way up to into the mid 80s. And as soon as the dollar goes northward again, I’d be ready for a correction in oil. A combination of profit taking and technical patterns playing out, Oil is overdue for a fall. And you can bet that these beloved oil refiners will ride that train down as well.

So how should you play a correction in oil? Using the HiddenLevers screener, I just searched for stocks that go up as the price of oil goes down. I also set some other criteria in place – 1 billion usd market cap and decent volume trading per day (500k shares). I found a couple airlines, United (NASDAQ:UAL) and Continental (CAL) and it stands to reason. The airlines have gotten a bit beat down in December, and even more so just last week due to the great blizzard in the Northeast US. I’d look for a bounce back there as Oil corrects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.