Playing The Oil Trend With UWTI

crudeoilJacob Hess:  The best way to cash in on a trend in crude oil is not by buying and selling the contracts but watching ETFs that track their prices. Over the past two years, these exchange traded funds have become very popular as oil prices plunged to sub-$30 levels.

In a MarketWatch article, the accelerated crude ETF, UWTI, was cited as being the fifth most traded security by millennials.

The VelocityShares 3x Long Crude Oil ETN is hardly a tool for hedging against the risk of volatile oil prices.

Instead, traders use the derivative as way to bet on different oil trends hoping to cash in on the accelerated payout it offers.

This ETF generates a whopping 119 million shares of average volume despite year-to-date losses of over 38%.

Its popularity trumps both the OIL and USO funds which average about 5 million and 51 million shares with YTD losses below 25%.

There’s no doubt that UWTI provides traders the opportunity to cash out on an accurate projection of oil prices, but its high leverage and volatility can translate to large, sudden losses if a trend reverses.

The best way to reduce risk created by unexpected, short-term fluctuations is to buy at the very bottom of the trend and hold until it tops off in the long run.

With the market beginning to tame, investors should start to consider this trade before it’s too late.

During the week ending March 12th, the price of West Texas Intermediate contracts rose from the low $30’s as investors finally saw production slow down.

Baker Hughes reported earlier that week that rig counts fell to an all-time record low of 480 instigating pent up bullish sentiment.

Recent evidence showing a decline in production has caused gains of just over 20% in the past month of trading sessions.

While analysts are looking forward to a smaller supply in the future, traders can’t ignore the risks of the current fundamental situation which is still oversupplied by the extra oil still sitting idle in storage.

Given how volatile oil trading has been over the past year and a half, skeptics have reason to doubt the rebound and may even see another plunge coming.

That would mean complications for those waiting to bet on a bottom.

I’m here to tell you not to worry. It’s time to bet on that bottom.

oil chart

Introducing the Deviation Moving Average first published and constantly updated here.

This indicator is similar to a trend line with an adjustment that accounts for a constant deviation in price.

The blue line follows WTI price, and is coupled with the orange line, a 50-day moving average plus the 10-day moving average of the actual price’s deviation from its 50-day moving average.

With this enhancement, traders can track actual price movements against a deviation that the group has determined is acceptable.

Because of intraday trading, the actual price will move either above or below its trend line. Crossover points show a reversal in short-term sentiment.

The gap (length of time over or under the orange line) between each point is usually the same size and the variance (absolute value of the difference between the two lines) peaks at about the same height.


This idea can be better visualized by the difference chart which is plotted over the past year. In the very volatile 2015, the gaps of smaller sentiment trends lasted just under a month with variance peaking at  about $4.00.

Using these observations, investors can predict where a small reversal may take place and where the momentum of those reversals are pushing the overall trend. 

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