The set-up: This is a technical trade with a very favorable risk-reward profile. Looking at the chart, there was a very clear resistance level that oil had been fighting for most of the year, consistently making lower highs.
On Thursday, we had a nice breakout on the chart.
There is the potential here for crude to go back to previous highs, which would be in the $55 range, while the downside risk would be at the level of the $200-day moving average, maybe down to the 50-day moving average if you want to be a bit looser in setting your stops.
That means we have up to $6 in potential gains with about $1 in risk.
How to play it: United States Oil (USO) is a good fund for tracking crude; I’m also fine going with a leveraged play on this — something like the VelocityShares 3X Long Crude Oil ETN (UWT) — but because this is a swing trade and will take several days to play out, anyone using a leveraged fund must remember that tracking error grows the more full days you hold those funds. Also, I should note that oil is a commodity I am comfortable holding over the weekend, as it tends to hedge world events; if something bad happens around the world, oil prices would tend to rise in response, so you can ride this comfortably while watching this technical trade unfold.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.