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An Excellent Risk/Reward Setup in Oil

By Jeff Clark
Thursday, October 22, 2015

For about 30 minutes last week, I was speechless.
I had joined all the other Stansberry Research editors on stage at the Stansberry Conference Series event in Las Vegas. We were participating in a question and answer session with the audience.
Most of the questions were about oil and oil stocks...
Stansberry Research founder Porter Stansberry did most of the talking – as he should. I don't know of anyone else who has done more research on the oil and gas market... who has made more correct calls in the sector... or who has made more money for his readers.
Matt Badiali – our resident geologist and regular contributor to Growth Stock Wire – also chimed in... along with several of the other editors.
Most of the discussion was bearish about the longer term. The price of oil is headed lower, and oil companies are going to struggle.
I said nothing. I sat there like one of those cartoon monkeys with his hands over his mouth vowing to "speak no evil."
I'm a technical guy. I study charts. And I focus on short-term price movements in the markets. I wasn't going to challenge the long-term outlooks of these experts. They're probably right. The price of oil is probably headed lower over the longer term, and oil companies are probably going to struggle.
But in the short term, right now is a good time to take a low-risk trade in the oil market.
The price of oil bottomed in August at about $38 per barrel. It rallied to $50 earlier this month – an explosive 32% gain in just a few weeks. And we could soon see oil rally again...
Take a look at this chart of West Texas Intermediate (WTI) crude oil...
In technical analysis, the 50-day moving average (DMA) line is often the defining line that separates intermediate bull and bear trends. A stock is in a bull trend when it's trading above its 50-DMA. A stock is in a bear trend when it's trading below its 50-DMA. The position of the nine-day exponential moving average (EMA) helps to confirm the trend.
Last month, oil popped above its 50-DMA. The nine-day EMA pushed above the 50-DMA as well. This "bullish cross" set the stage for the fast 11% rally in oil two weeks ago.
Since then, the price of oil has pulled back. It is now trading just above the support of its 50-DMA.
It's this sort of pullback that gives traders a low-risk chance to buy into a bullish trend.
Aggressive traders can buy oil right here – just above $45 per share – in anticipation of a bounce off of support and the continuation of the rally phase. A move back toward this month's earlier highs would earn a $5 profit per barrel.
If oil goes the other way and breaks down below the support of its 50-DMA, then traders can set a tight stop at $44.50 in order to limit the loss on the trade to just about $0.50.
This is an excellent risk/reward setup to trade oil in the short term – no matter what your opinion on the longer-term price of oil.
Best regards and good trading,
Jeff Clark

Further Reading:

While oil may be a good short-term trade, Matt Badiali recently warned readers about Big Oil stocks. "Are the dividend payments of the world's blue-chip oil companies safe?" he asks. "Today, we're suggesting the impossible... Some of these dividends could be cut." Get all the details here.
"There's little agreement these days as to where oil prices are headed," Matt writes. "But there are two important factors that will have a big impact on oil prices in the near term..." Learn more here.

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