Crude Oil Headed for $112 and Should Take Energy ETF Along for Ride

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), 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), 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.

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