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Tickers in this Article: USO, DIG, CLB, PDS
One of the most reliable of intermarket relationships is that of the dollar and assets priced in dollars such as commodities. Because this is an inverse relation, the typical behavior is for rising asset prices with a falling dollar, or vice versa. The logic behind this reasoning is that if the dollar falls, it takes more of those dollars to purchase the same physical commodity. Thus, the price for that commodity rises. While at times market relationships can decouple, eventually this inverse relationship holds true. (For related reading, check out Taking Advantage Of The Weak U.S. Dollar.)

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While much of the recent focus on assets that benefit from a falling dollar have centered on precious metals, another asset that has been benefiting is oil. Oil, as measured by the United States Oil Fund (NYSE:USO) ETF, is quietly trading at prices unseen since last December. While this is still a long way from USO's 2008 summer highs in the low $100s, it is also starting to ramp up, with long-term interest rates at historically low levels. The fear for many is what will happen when the Fed eventually raises rates, and this possibility is probably starting to find its way into assets like this ETF. The chart for USO shows that it was able to clear a base it formed from May through October, and it has been consolidating this breakout in a bullish fashion while forming a flag type pattern. It will be interesting to see if it can follow through with a move above the $41-42 level. (For related reading, check out A Guide To Investing In The Oil Markets.)
Source: StockCharts.com

One way to take advantage of rising oil prices is with a basket of oil service stocks. The Pro Shares Ultra Oil and Gas Index ETF (NYSE:DIG) measures the performance of the energy sector and components include oil drilling equipment and services, coal, oil companies, pipelines, and gas producers and service companies. It had been trading in a base for several months before finally clearing resistance in October. It quickly came back for a retest of the base into early November, and appears to have held the area as support. The levels to watch in the near term are the recent highs near $39 and the recent low near $32.
Source: StockCharts.com

An individual stock that may be worth tracking if the sector continues performing well is Precision Drilling Trust (NYSE:PDS). PDS had been forming a large cup-and-handle type base over the past several months and it finally made a push above resistance in September. It has been consolidating above the prior resistance area since the breakout and could be close to attempting a follow through. The $7.60 area has bears watching, as it capped the past two rally attempts.
Source: StockCharts.com

Another individual stock that could benefit from continued strength in the group is Core Labs NV (NYSE:CLB). CLB has been in a fairly steady trend higher since bottoming in December 2008. It did experience a one-month correction after rallying to a high in early June, but it was able to better the June high a few months later in September. It is currently consolidating in a triangle base, which is often a continuation pattern.
Source: StockCharts.com


Bottom Line
With oil at fresh multi-month highs, it's possible that momentum can carry the price farther than most think. If either the dollar continues to weaken or the economy shows any signs of strengthening, it could cause a sharp rise in oil prices. This would directly benefit the oil sector and possibly fuel a continuation move higher. While these stocks are still in a longer term bear market, there is still plenty of room for a corrective move higher in the short to intermediate term. Rallies in bear markets can often produce sharp gains quickly, so as traders we must be open minded to all possibilities.

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The author does not hold a position in any of the companies mentioned above at the time of this writing.

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