Within two years oil hit $36 a barrel, and it exploded to $147 in 2008.
I vowed never to let that happen again.
Now, I’m not one to rush into trading commodities. That’s a disaster waiting to happen because betting on commodity price movement is like playing roulette. I’ve tried to trade gold a few times, on both the long and short side, and have failed.
However, I’ve done better with oil, shorting it in 2008 at $125 and buying when it rebounded to $60 on the way to $114.
Watch Crude Oil Prices
Take a look at the chart below, courtesy of StockCharts.com:
Exactly one year ago, I suggested oil could break $35, and possibly go to $25. I suggested a few entry points for the big oil-producing names, and I think those entry points still make sense, as long as you also do what I suggested and just nibble as you average down.
However, the time to actually buy crude oil may be nearing. As I write, crude has bounced off its low of $27.56 and is just under $30. As you can see from the chart, resistance is at $33.55 and support is at $25.
The first scenario is the least likely, in my opinion: oil breaks through resistance. If it does, you may want to open a very long-term position in the PowerShares DB Oil ETF (NYSEARCA:DBO) with the expectation that crude oil will recover at some point and you’ll see a good return on the direct oil investment. Be warned, however, that it could turn back down again.
A Plan to Buy Oil
The more likely scenario is that oil falls further. As you can see, there are three price supports – the aforementioned $25 level, the $17 level and the $10.65 level. The more oil falls, the more it will recover at some point in the future, so the more aggressive you can make your long position.
My plan to buy oil is as follows. If oil hits $25, I will definitely go long the DB Oil Fund mentioned above. If oil breaks $25 and hits $21, I will sell half of the DB Oil Fund and buy an equal amount of the 2x leveraged long security, the ProShares Ultra DJ-UBS Oil ETF (NYSEARCA:SCO). This actually buys Brent crude oil, but the price is usually aligned with West Texas Intermediate.
If oil prices hit $17, I will sell the other half of the DB Oil Fund and redeploy that into the 2x leveraged security.
If oil prices hit $14, I will sell half of the 2x product and put that money into the 3x product, the VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI).
And if by some miracle we get to $10.65, I’ll go all-in on the 3x product. In fact, because I’ll be earning three times the movement of oil on the upside – and there’s no way oil stays at $10 per barrel – I will likely reallocate other parts of my portfolio into this trade.
Because if oil recovers to, say, $44, I will make 12 times on my money.
No investment will offer that kind of return.
This article is brought to you courtesy of Lawrence Meyers from Wyatt Investment Research.