The FRED Report ( www.thefredreport.com) has a few seasonal trades that we generally monitor. One of these is to buy oil stocks in mid to late June for a summer rally. This year, for various reasons, the rally did not start in June -- but can it start now that the Gulf oil spill is being contained?

We show below charts of the United States Oil Fund (USO), an ETF that tracks crude oil, and the United States Natural Gas Fund (UNG), an ETF that tracks natural gas.  Readers can see that Oil has been in a basing pattern and may be picking up.  Natural Gas has also started to pick up. These charts suggest to me a rally in the petroleum complex could occur through the end of summer. How can we capitalize on this rally? There are many oil stocks as well as ETF's we can use.

First, we cover a couple of ETFs. For big integrated oil stocks, our favorite ETF is the Select Sector Energy SPDR (XLE).  This exchange-traded fund is our favorite way to buy a diversified basket of large-cap oil stocks, as it is the most liquid of the oil stock ETFs.

For oil services -- we like the OIH, and also the IEZ. Of the last two, the IEZ is a little stronger on a technical basis, but also a little less liquid and therefore more risky.

Second, we cover a couple of stocks for equity investors. The first one (and the most difficult!) is BP (BP), where we have had a lot of questions. We show below a weekly chart of BP, and contrast it with Chevron (CVX). Because of the spill in the Gulf, BP has dropped significantly in price. Such a price drop is usually not a plus for technicians, who generally try to buy strength and not weakness. Investors should ask themselves if they are willing to assume the risk of owning BP in the face of lawsuits, adverse news, and such that may occur in the aftermath of the spill. While nobody knows for sure what will happen, it seems a better, less risky bet to pick something like Chevron, which is unconnected to the spill.

Note that BP has a gap in the 42 area that has not filled and also the current price of the stock vs. the May lows. Contrast this with CVX, which is comfortably above the May lows after having dipped below. The market appears to us to be saying that very little favorable news can be expected on BP and we suggest you find another way to take advantage of the last part of the seasonal summer rally in oil, should it occur. Another lesson here is that the cheapest stock in a group is sometimes cheap for a reason. In the markets, it usually pays to buy quality and not "damaged" goods. Another way to say this is that sometimes cheap is for the birds!

Disclaimer:

This article does not constitute a solicitation or offer to buy or sell securities. Interested parties are advised to contact the entity with which they deal if they desire further information. No representation is being made that the information herein is accurate or complete. Any opinions or estimates contained in this communication represent the judgment of Fredco Holdings, Inc. at this time and are subject to change without notice. Fredco Holdings, Inc, its employees, officers, directors, principals, agents, affiliates or advisers may from time to time provide recommendations with respect to, acquire, short sell, hold or sell a position in, the securities or instruments named or described in any report or information being provided herein, provided however that no buying or selling activity will be taken with respect to a security referenced in a report by such parties within three days of such report's publication. The information contained herein was prepared by The FRED Report, which is solely responsible for the contents of this report. Although Fred Meissner, Jr. is a registered representative of Lamon & Stern, Inc., neither Lamon & Stern nor any of its principals, officers, affiliates, agents or employees is in any way responsible for the contents of this message.

More detailed information, including actionable alerts, is available to Fred Report subscribers or 30 day free trial at www.thefredreport.com .

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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