Monday, February 21, 2011

Focus on OIL this week.

With the unrest spreading in the middle-east the focus lies this week (and probably upcoming weeks) on oil prices. Already oil prices spiked 5% today, now trading a little over $90 a barrel and according to my analysis, it may even go higher. A good way to trade oil is to trade the Exchange Traded Note (ETN); OIL which tracks an oil based commodity index.
This is what I would call a 'high probability trade' since it's highly likely with the recent spike we have seen in oil prices. A aggressive 'out of the money' call option ($24 strike price) approach to this trade is the one I'm taking.
Let's take a look at the chart below for OIL.

As you can see, the MACD is about to cross over and the RSI has been in undersold territory for a few weeks. Which was kind of surprising to me because the turmoil in the middle-east has been going on for about that time. Oil prices were barely moving, a sign applying a break-out strategy would be appropriate in this instance. And a break out did occur. 5% higher in fact. It wouldn't surprise me if we see oil trading around $100 by the end of next month. 
If would rather stay away from oil, there are other indices to look into. First, the Dow Jones (or DIA; Diamond ETF) is likely to trade lower since that's always the usual effect. Higher oil prices weigh down on the US economy as a whole because people have less money to spend on goods, services etc. Another one that is almost aways affected is the VIX (panic index). In an event like this one the VIX (or VXX) has the tendency to spike. Already this index is trading relatively on the low side. Pretty much it's all a big chain reaction, with a few key indices (mentioned above) to look out for.

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