If you ever find the need to fire up a heated debate, just bring up the cost of crude oil with any investor. You'll likely hear everything from conspiracy theories to the perceived success or failure of electric vehicles and everything in between. While the verdict on electric vehicles is still out, there is no denying we live in a world that still relies heavily on oil. Today's EIA Petroleum Status Report showed a drop of 2.2 million barrels for a sixth straight week decline. As time moves on, I expect similar reports and the price of oil to continue on higher.
In my first screen shot I've included daily charts of crude oil futures alongside the ETF I'll be discussing today. The indicator you see hovering on top of the price action is a dual 30-period linear regression channel with one and two standard deviations. I like this indicator for gauging longer term trends, and as we can see with both crude futures and the Oil Service HOLDRs ETF (OIH), we're in a very nice uptrend.
Typically I'll look to play stocks in between these levels similar to a reversion to the mean trade. What makes this situation unique is both charts have a daily squeeze forming and we're about to release some volatility. This volatility can easily blow through these deviations and an entry at the first standard deviation looks very appealing at this point. I'm going to be looking for a slight pullback here to pick up call options, right around $142.80. If we are able to get filled here I'll be using about a $3.00 stop. This gives us room to come down and test our key middle trendline if needed and remains just outside our average true range (ATR). If we don't get filled here I'll continue to watch the trend and consider any pullbacks buying opportunities.
Trade: Buy to open OIH February 137 calls for $8.50, with a stop at $139.00 and a target of $145.70.
At the time of publication, John Carter held no positions in the stocks or issues mentioned.
John is a Commodity Trading Advisor with Razor Trading. McGraw Hill commissioned him to write a book entitled Mastering the Trade, which was released in January 2006. Carter has also been featured on ABC Money. He and Hubert Senters founded and run the Trade the Markets web site.
On January 19, TheStreet's OptionsProfits is hosting a webinar featuring John Carter of Trade the Markets. Concepts, citing specific trade examples, will include: market sentiment, technical indicators and trading psychology. We will also discuss how to use options and other asset classes to position and manage your portfolio through 2011.
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