Thursday, December 11, 2008
My old buddy Dave is in a bar somewhere relighting his trick birthday candle.
I first told you about Dave early last summer when oil was popping over $140 per barrel. I don't want to get into all the details here, but his story was a good illustration of the cyclical nature of the oil market. It argued well for lower prices, and I told Growth Stock Wire readers "now is a bad time to buy oil."
Today, the argument goes the other way. The birthday candle has been snuffed out. Bullish oil analysts are tougher to find than honest Chicago politicians.
Oil is trading for $43 per barrel, down over $100 from its summertime peak. Everyone is bearish. And major brokerage firms are forecasting a $25 price target before the decline is over.
Of course, these same firms forecast $200 oil last summer.
So who are you going to believe? The huge investment banks – with their high-paid analysts, enormous research departments, and complex logarithmic computer forecasting programs – who got it wrong last summer? Or me and my friend Dave, with his 10-cent trick birthday candle, who got it right?
Yesterday, oil rallied 8% in the face of a bearish inventory report. Anytime stocks or commodities can rally in reaction to bad news it's a pretty good sign the market has already discounted the worst – at least for the short term.
It looks to me like oil is in the early stages of a counter-trend rally that could last several weeks and boost the price of crude oil up to between $55 and $60. That's a gain of 25%-35% from yesterday's price.
The best way to trade this rally is with the PowerShares Crude Oil Double Long exchange traded fund (DXO). DXO is designed to provide two times the performance of crude oil. So if crude oil rallies 25%, then DXO should jump 50%. If crude oil falls, then DXO investors will suffer twice the loss.
Here's the chart...
Ironically, PowerShares created this fund when oil was trading at its all-time high. Since its introduction, DXO has lost 90% of its value. But look at the action over the past month. Notice the strong positive divergence in the moving average convergence divergence (MACD) indicator. This shows the momentum behind the recent decline is weak. And it's the first sign of a possible turnaround.
If oil can rally back up to $60 per barrel, then DXO should rally above $5. That's a gain of 70% on yesterday's closing price.
And it's a pretty good return off of a 10-cent birthday candle.
Best regards and good trading,
Gold breaks $800 an ounce... gold stocks reach two-month highs, up nearly 50% from November lows.
Infrastructure stocks continue to rally... up double-digits since December 1.
Video-game maker Electronic Arts lowers sales forecast, drops 17% to eight-year low.