Where is Oil Headed?

How to Trade Oil Short Term (XES)

Where is Oil headed?

Trading XES short Term

With the complicated problems we have been inundated with concerning oil and the deep water leak by BP, what should we think of investing in oil?

Certainly BP’s problems have caused people to move away from oil. Don Dion from THE STREET writes; “The oil industry has recently fallen out of favor in the eyes of many consumers and lawmakers as BP(BP)Gulf of Mexico from the site of the Deepwater Horizon explosion continues to struggle to halt the flow of oil spewing into the .” And wherein this may be true, there are other things happening in the world
that have influence on oil also.

Royal Dutch Shell PLC warned Nigeria that the $40 billion investment in its countries’ oil could be at risk if the nation passes a bill designed to overhaul the industry. The bill would reduce profits to the oil companies like Chevron, Exxon, Shell, & Total…and put more of that money back into the Nigerian economy. Or so the bill proposes. It is an ugly situation in and of itself.

Still, the government wants the production money staying in Nigeria. The tense problems could cause concerns over production, as Nigeria’s oil market can cause global prices to spike. Nigeria one of the top oil exporters to the U.S. So there is more than BP to consider out there.

From a technical stand point, we would be trading with a bearish flavor short term.

Bespoke Investment Group points out that an “Iron Cross” has formed in the Oil Charts. “An iron cross occurs when a stock or index’s short term moving average (50-DMA) falls below the longer term moving average (200-DMA) while both are decreasing. According to people who follow technical analysis, an iron cross is typically a prelude to further losses.“

This particular formation is consistently following through on its bearish threats. “So how good a sell signal has an iron cross been on a historical basis? Since 1997, the OSX has had four other iron cross formations. Looking at the index’s historical performance following these four periods shows that the OSX has averaged declines over the next week, month, three months, and six months. While the range of returns varied widely over the three and six month periods, the index has seen declines in the one month period after each prior occurrence.”  For this reason we really advise a bearish lean if one is looking into a short term investment in oil.

The charts on XES for example almost mirror the SPY. 

If we put them side-by-side with each other we may have a small difference but mostly they work together. We can see where oil has recently fallen more (do to BP) but it is moving just like the market as a whole. Do not look for any long term upswing soon. We will inevitably see 2 to 3 week bullish and bearish moves as oil ends up forming a wide trading zone over the next 4 to 5 months.

Prepare to trade in this zone, but presently give it a bearish flavor.