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Trade the Late Seasonal Rally in Energy

Stocks in this article: USO UHN XLE OIH

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( The FRED Report) -- We are still holding on to our expected rally theme as highlighted in last week's article. As long as $120 holds on SPY (SPY) then we remain favorable on U.S. equity markets into year-end. We highlighted this level along with other market observations in our weekly conference call yesterday. You can listen to the recording here.

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As such this week we will talk about our favorite sector seasonal trade in the market. This is to buy oil or oil stocks at the end of October and sell them at the end of January. Various authors have written about this seasonal tendency, and the way we take advantage of it is to be ready to get a buy signal in October, and then be sure to take it should it occur. This concept was also discussed in our call yesterday. Listen to the energy portion of the call here. First, we look at United States Oil (USO), the ETF for oil. Notice how the stochastic indicator went below, and then above, 20, and the moving averages crossed shortly after.

The next stage of our analysis is to look at heating oil, as it is a bit more sensitive at this time of year to supply and demand. Readers can see that the same pattern occurred on heating oil at the same time, confirmation that this trade has a better chance of working.

The last stage of our analysis is to see where energy stock ETFs are in the mix. Sometimes, these stocks rally in anticipation of an oil rally, so there is no real trading opportunity in the stocks. In other cases, these ETFs make a low along with the commodity. Again, we look at the situation in Energy Select Sector SPDR (XLE) and Oil Services HOLDRS (OIH) this year, and note that these ETFs had fallen along with oil.

Historically, the seasonal oil rally works around 7.5 times out of 10, so if the signals line up, this represents an excellent trading opportunity on the buy side. Here at the FRED Report we look for it every year at this time. This may be something you could add to your own trading repertoire.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.�A detailed bio is here:Fred Meissner.

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