Getting A Handle On The Long-Term Oil Trade (USO, DBO, ERY, ERX, XLE)

Richard Rittorno: WTI crude oil has been back on the rebound after traders received the U.S. API report reflecting the largest inventory drawdown in seven weeks. Money flowing back out of the U.S. dollar as a safe haven also helps to send WTI higher.On days like this, traders in any market have to take a step back and look at objectively and ask themselves what, if anything, has changed on a long-term fundamental basis.

  • Leaders and policymakers in the euro zone and in Athens have yet to produce an executable solution.
  • Greece still has high risk of default.
  • The crisis will likely keep the U.S. dollar strong as it continues its role as the safe haven/defensive play.
  • Iran is still rattling its saber.
  • China keeps growing as a new consumer of oil and all forms of energy.
  • The U.S. economy is stronger than many economists suspected a few months ago.

The lack of resolution to the Greek situation raises the risk of a recession in Europe, curtailing manufacturing activity and other oil consumption there. As yet, there is no indication that demand in China and the United States will do anything but keep rising. And Iran is the wild card that can only play to the upside.

Yesterday, WTI broke above resistance at $97.70, exposing the top of a downward channel formed in early January — now at $100.50 — and printing a bullish engulfing candle formation pushing price above the T3 Tilson. This in turn suggests that price is heading back to the upper channel boundary.

The price move from the United States Oil Fund (NYSEArca:USO) has been a little more consolidated because the ETF only trades during NYSE exchange hours, while the commodity is traded overnight as well.

Traders will find the bullish engulfing candle on this chart as well, along with an oblong shape morning star, suggesting that the ETF also wants to move higher — at the moment, there is not much divergence between USO’s situation and the technical outlook for the underlying commodity.

Traders who step back and see the landscape has not changed in reality can get ahead of the moves and, frankly, ignore the headlines. Every day we see “Greece” or “China” or “Iran” in the oil market reports is another day that nothing truly significant has changed.

There will be incremental developments, but in the absence of a rescue, a recession or an outright act of war, the risks are tilted toward demand for oil remaining strong and prices ratcheting upward.

Get head of the move back into oil by looking for an entry point in the USO on the retrace test to the bullish candle formation.

Traders afraid of missing the move can put half of their position on now and the reminder on the pullback. If the pullback does not occur, you still have 50% of your capital off the sidelines when that first move comes.

Related Tickers: PowerShares DB Oil Fund (NYSEArca:DBO), Direxion Energy  Bear 3X Shares ETF (NYSEArca:ERY), Direxion Energy Bull 3X Shares ETF  (NYSEArca:ERX), SPDR Select Sector Fund (NYSEArca:XLE).

Written By Richard Rittorno For Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the  team of Emerging Money to bring you cutting edge global news and  analysis.

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