Once Again, Another Oil Short Setup

WTI Light Crude Oil is once again setting up for a short trade. WTI Crude has offered many great risk/reward short setups in the past and I am seeing another great opportunity here again. The crack spread has fallen greatly over the past month, however, I think we can see a small mean reversion trade here as WTI gets pretty extended in its run from the double bottom at ~$76.

The trade here would be to short Light, Sweet Crude Oil Futures near or at $100/barrel with a stop above $102.50, putting your risk at about $2.50. My first target would be the 200 day moving average at around $95.17, putting your reward at least at ~$5.00. That would give you a 1:2 r/r scenario. My second and main target would be at $90, which has been a huge level in the past. I am skeptical it can hit that, so I would be definitely taking profits in the $91-93 range if the trade works out (which also happens to be where the 38.2% Fib retracement is).

Another thing working in your favor here is the bearish Ascending Wedge (or rising wedge). Though not my favorite pattern (click here to read why it basically sucks), WTI Crude can see some quick profit taking if that uptrend is broken. The measured move here would land it somewhere around $89-$90 (coincidentally where that huge level is located). I would be surprised to see crude below that $90 again this year (2011).

I am likely to take this trade by shorting one the ProShares Ultra DJ-UBS Crude Oil ($UCO). This ETF gives you double leverage and possible contango issues, thus putting the trade more favorably on your side. You can also short the other oil ETFs, $USO and $OIL, or you can go long $SCO.


The Chart

$CL_F – Light, Sweet Crude Oil Futures Daily Chart


















The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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