For oil, the most bullish time of the year is between February and June. Over the last 20 years, these months have seen crude rise by 1.4% to 4.4% per month. February, March, and April are the most bullish months, with average gains of 3.6%, 4.4%, and 3.6%, respectively. With oil trending higher in 2016, and the price consolidating in early 2017, if oil breaks this consolidation to the upside, then seasonality and price action will align pointing to higher prices over the next several months.

crude oil seasonality chart

Trading ETFs related to oil and gas stocks is one of the best ways to take advantage of an uptrend in oil. The SPDR S&P Oil and Gas Exploration and Production ETF (XOP) rallied more than 100% during the oil rally of 2016 and has pulled back slightly off its highs. Traders can watch for a rally in XOP above $41. That would break a short-term descending trendline, indicating the pullback is likely over, and the uptrend in price is continuing. A stop loss can be placed near $38, just below the Feb. 8 intraday low.

Another oil and gas ETF to consider is the Energy Select Sector SPDR ETF (XLE). This is a more diversified ETF, with holdings in various segments of the oil and gas market (not just exploration and production, like XOP). In 2016 it rallied as much as 57% off its lows and has pulled back slightly from its highs. A rally above $74 is a bullish signal, breaking a short-term descending trendline and indicating the uptrend is resuming. Stop losses can go near $70.50, just below the Feb. 8 intraday low. XLE has the added benefit of a 2.3% dividend yield. While seasonality tells us that a run to the upside could stall out toward the end of June if the price action remains strong traders may be able to pick up a few dividend payments (next ones are in March and June) in addition to capital gains on potential price appreciation.

The Bottom Line

Seasonality and the uptrend since the start of 2016 indicate that the next few months could be bullish for oil and oil-related stocks. Rallies above the short-term descending trendlines in these ETFs signals that uptrends could be resuming. Seasonality indicates that upward momentum typically tuckers out around June or early July. Therefore, traders could look to exit around then, or, utilize a trailing stop loss method which is when the stop loss is moved up to just below major swing lows. As the price moves higher this strategy will lock in gains and gets the trader out if the price reverses to the downside.

There are no sure things in trading, so utilize a stop loss to help control risk, and only risk a small portion of account capital on any single trade.

Disclosure: The author doesn't have positions in the ETFs mentioned.

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