Time For Oil's Summer Bump?

By Casey Murphy | May 22, 2014 AAA

With the summer months approaching and motorists preparing to take to the roads and sky for summer vacations, now could be the time to invest in oil.
Year-to-date oil prices have risen 5.02% as measured by the iPath S&P GSCI Crude Oil Total Return ETF (OIL), and based on its stock chart it looks like a move higher may be in the cards over the next few months.

Chart Patterns Suggest Oil Prices To Rise

Based on OIL's chart, shown above, you’ll notice that a defined ascending triangle, which suggests that prices could see a sharp break higher. Based on the setup of the pattern, traders will want to enter a buy stop order for when the price is able to move above the resistance, which is currently set near $24.85. The recent bullish crossover of the MACD indicator could also be used by traders as confirmation of a likely move higher. In the event that the price is able to close above $24.85 on above average volume, the next target price would be near $28.40.

Invest In Oil Using Exchange Traded Funds

Since the development of exchange traded funds in the late 1980s, it has become far easier for the average investor to gain exposure to nearly every market segment. Investors looking to gain exposure to oil prices have several options, including The United States Oil Fund ETF (USO). This ETF seeks to replicate the performance – less expenses – of the spot price of West Texas Intermediate (WTI) light, sweet crude. With an annual expense ratio of 0.76%, this is a popular option for traders who do not have a futures account. Based on the chart shown below, you’ll notice that it is nearly identical to the OIL ETN mentioned earlier. From a technical perspective, the golden crossover from early April suggests that the long-term trend should remain upward for the foreseeable future. The recent pullback toward the 50-day moving average suggests that this could be a good entry point for traders. Other technical indicators, such as the MACD, stochastics and relative strength index will likely be used as signs of confirmation. (For more, see Stochastics: An Accurate Buy And Sell Indicator)

Investing In Oil Companies

For traders who want direct exposure to the companies doing the exploration and drilling, a couple of interesting options include Marathon Oil Corp. (MRO) and Cabot Oil & Gas Corp. (COG)

Traders who want to increase exposure to the entire vertical of oil and gas production will want to take a closer look at MRO. As you can see from the chart below, the 50-day moving average (blue line) recently crossed above the 200-day moving average (red-line), which suggests that the long-term trend is now in the upward direction. If you combine the positive signals on the chart of MRO with the moves in the underlying commodity it makes for an interesting trading opportunity. 

Cabot Finding Support

If you take a look at the chart of Cabot Oil & Gas, you’ll notice that the price is currently finding support near the influential 200-day moving average. Given the strong move over the past year it's not surprising that the price is undergoing a period of consolidation. Traders will keep a bullish outlook on the stock and set their stop-loss orders directly below the 200 DMA. 

The Bottom Line

A bullish ascending triangle shown on the chart of oil prices is suggesting that the coming months could be very rewarding for traders of the petroleum-related assets. For retail investors looking to increase exposure to this sector, there are several key ETFs and companies that are worth investigating further. Several options were mentioned in this article, but there are many more available to those willing to do a little digging. For more on this topic, it's worth reading the Oil And Gas Industry Primer. For more investment ideas, check out Another Way To Oil

 

 

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