NEW YORK (TheStreet) -- The energy sector has surged during the last two months, and this can be seen in the performance of the XLE Energy Select Sector SPDR Fund (XLE) - Get Energy Select Sector SPDR Fund Report, an exchange-traded fund. If crude oil continues its current climb toward the $112 level, the XLE is likely to continue to rally for another few days or possibly a week.
Some investors might think about gaining exposure to crude oil through the United States Oil Fund (USO) - Get United States Oil Fund LP Report, which was designed to track the price oil. The problem with this and some other ETFs that attempt to track an underlying commodity is how the funds are built. They own multiple futures contracts and often do not react in the short term to news the way the spot commodity or front-month contracts do. Thus, you can nail the timing of a trade, and a commodity will move in your favor, yet your fund will lose money or go nowhere.
Focus on the Technicals
WTI crude oil has formed a bullish ascending triangle pattern from March to May of this year. The breakout to the upside is bullish and should be traded that way until the chart says otherwise. This breakout and first pullback must hold, or I will consider it a failed breakout. So if the price dips and closes on two days below the breakout level, it will be a major negative for oil.
The range of the ascending triangle provides us with a measured move to the upside, which is $112. Typically the first pullback after a breakout can be bought. The first short-term target to scalp some gains would be $109, and at that point it would be wise to move your stop to break-even. Trading is all about managing capital and risk. If you don't, then the market will take advantage of your lack of discipline.
Looking further back on the chart, you can see the double-bottom formation, also known as a "W" formation. Once the high of the "W" formation is broken the trend should be considered neutral or up.
Also note that the RSI (relative strength) has been trending higher for some time now. This means money is rotating into this commodity. This is in line with my interview this week with Kerry Lutz and my recent article talking about the next bull market in commodities and the Toronto Stock Exchange.
WTI Crude Oil Trading Conclusion:
In short, oil has some extra risk around it. The recent move has been partly fueled by news overseas. So at any time, oil could get a lift or take a hit by news that hits the wires. I tend to trade news-related moves with much less capital than I normally do because of this risk.
At the time of publication, Vermeulen held no shares of stocks or ETFs mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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