Crude Realities

• Posted by Leigh Drogen
• on October 12th, 2009

I’m long crude oil this morning via $USO at 37.82 and will add a second lot at 38.38. I want to take a few moments this afternoon to focus on the energy complex as a whole, as these are important levels.

$USO broke through the upper 20 day donchian channel today giving me a buy signal.  I trade two systems, the 20 day and the 55 day.  Given the triangle pattern we are seeing in crude I’ve gone with the 20 day because it gives me a better risk reward entry.  Notice as well the bullish MACD signal coming from a tight coil pattern.  Watch for volume to come in on a break of the triangle consolidation pattern to confirm the move.  The 200 day moving average is now flat and the primary trend in crude is now pointing up.  Triangular consolidation patterns usually resolve themselves in the direction of the primary trend, a very useful bit of info if you were trading the energy complex last fall as it went to hell.

The weekly crude oil index chart is up against the 100 week moving average and has put in a large ascending triangle.  The $75 area is also confluent with the 38.2% retracement from the 08′ highs.  A move through this area should get crude going to 85 in a hurry.

I’m looking at two specific assets as a guide in crude right now, Russian equities $RSX and the Canadian Dollar $USDCAD.

Russia broke out in a big way early on in September and has been on a tear ever since.  The volume here is the most amazing thing as there is true accumulation going on.  Russia represents the “risk” trade in all its glory more than anything else as it shows both the largest reward for growth and largest risk to the energy complex.  I feel that investors piling into Russia are betting on the energy complex as a whole, the two are so highly correlated.  I am always looking for certain assets that run ahead and light the way for others, Russia is clearly telling us something here.

The Canadian Loonie is owning the US Dollar right now.  The Dollar is being owned by just about everything besides the Pound, which is in turn driving up the price of all other assets.  The falling dollar will buoy crude prices to some extent, but I am looking at the $USDCAD for a larger breakout in crude as the Canadian Dollar is so linked with crude prices.

Energy equities are leading crude to the upside here as the equity market as a whole is flying.  The oil services ETF $OIH is leading the way as it broke out for its triangle consolidation pattern.  It went on to retest the breakout level at the 50 day moving average and ripped from there.  The weekly chart tells the tale as $OIH broke above its 100 week moving average which is now flat.  Notice that oil service equities have lagged behind crude in the rebound as they have yet to make it to the top of the congestion area which sits around 160.  I am expecting major out performance here if crude rips.

The integrated and independent energy producers lag even further behind crude as the just recently broke out from a large base put in over the past year.  We are seeing the same test of the 100 week flat moving average.  I would not have my energy sector money here as this industry has lagged the rest of the energy sector.

Everything looks set for the energy complex to follow through to the upside.  If you play in this space, get long the strongest oil service names and more levered exploration names like $PBR .  Be aware that a failed breakout and a rebound in the US Dollar could crush crude very quickly.  Trade what you see, not what you think, and always manage risk.

Oil Service Favorites: $NOV, $CAM, $FTI, $DRQ, $HLX, $EXH, $RIG, $ATW

Independent and Exploration Favorites: $PBR, $CEO, $OXY, $APC, $NBL, $XCO

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