Crude Oil Hits $100.00! 3 Ways To Profit From It!
Thursday, January 3, 2008 | Chris RoweRating:
Historic event alert!Yesterday, there was one single futures contract traded at $100.00 a barrel! The trade preceding that one was 10 contracts traded at $99.50. I guess the person who bought one single contract at a 50-cent premium just wanted to be the first person ever to pay $100.00/barrel. Nothing much has really changed, but this definitely has a psychological impact on the market.
Now, I don't know what happens next, but there is a MACD buy signal on Light Sweet Crude, and the MACD buy signals have been pretty accurate in the past (green arrows).
So how can we profit from something like this?
Well, the first thing that we can do is play the energy sector. You don't have to go out there and buy oil futures, and you don't even have to buy an oil stock. We can simply buy energy related ETFs. XLE mimics the energy sector of the S&P500. Here are the top 10 holdings of XLE:
Even if crude oil sells off dramatically, the companies in this sector, on aggregate, will continue to profit. How would a sell-off in "black gold" affect XLE? I will have to save my psychic super powers for members of The Trend Rider, but consider the past. Crude oil dropped from $80 to $50 from early July '06 to early January '06. That's a 37% decline practically straight down (with little relief).
XLE only dropped from $58 to $54 and went back up to $60.00 in August '06. Then it had its biggest drop from $60 to a low of $50 in two months. So the biggest decline was just over 16%. 
In January of '07, XLE was right back up to $58.00. In fact, in the time that crude oil declined by 37%, XLE declined by 3%.
I would buy the ETF or call options on the ETF after I see a pullback. I see a negative divergence in the RSI, which made lower highs as the ETF made higher highs. I would be inclined to get bullish on this one when it pulls back to its 20-week moving average or lower.
Another way to profit is by getting bullish on the Oil Service sector by way of either OIH (an oil service ETF) or call options on the high-priced oil service index "OSX". This may be quoted as $OSX or in Yahoo! Finance as ^OSX. If I bought call options, I would buy the ones that expire in a year and that are deep in-the-money. (This index has more than doubled since Teeka Tiwari recommended buying the call options in The Tycoon Report two years ago. Buying call options on his recommendations probably netted closer to 1,000%.)
Below you can see a chart on OIH and below that are the top 10 holdings. I suggest waiting until OIH revisits the up trend line you see below, which should happen soon. When you see OIH near that up trend line, it's good to go and will likely move at least slightly above $210.00.
ANOTHER WAY TO PROFIT FROM EXPENSIVE OIL
Deep-in-the-money put options on the airline index. Did you know that airlines spend lots of money on oil? Neither did I! (Ha-ha-ha. I'm feeling goofy today.)
The AMEX Airline Index symbols are XAL. Again, depending on the service you use, it may be $XAL or ^XAL. Like the OSX, this is not an ETF, so you'll have to buy deep-in-the-money put options that expire in a year. I would wait to buy them, however. I would get bearish on this index after seeing strength come into it. You can see that I drew a red downtrend-line, so consider getting bearish on the index when it approaches that (upper) red downtrend-line. Don't wait for it to actually hit the down trend line though, as the down trend has steepened showing increased downwards momentum. This index will likely get cut in half from that point, or move at least down to $20.00.
2-year weekly
6-month daily
Diversification is the word of the day. Profit from the trend!
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
