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Cashing In On Energy Drop


Ways to navigate the commodity bear.


Unless you have been hiding under a rock the last few weeks you are well aware of the rotation taking place out of energy stocks. Whether this money flows into other areas or simply under the mattress is yet to be determined but trends that have been in place for years are being challenged and while many may believe we're close to the end of this move, a closer look reveals that we may just be at the beginning.

One can review a chart of the Energy ETF (XLE) and see the longer term trend line going back to 2006 that is now being challenged.

Chart courtesy of Telechart,

This line was tapped in mid August, however a snap back rally occurred and the real break was postponed. After yesterday's beat down, the support line is once again within an arm's reach and a break below the $69.00 level would trigger the short.

This similar pattern can be seen when going through many of the most recent favorites in the energy space such as Transocean (RIG) which as you can see broke through its uptrend line a few weeks ago, and is just now starting to consolidate before what looks to be another leg lower.

Chart courtesy of Telechart,

Exxon-Mobil (XOM) displays a similar pattern however it's more of a sideways channel that is on the verge of being broken, which would then become significant overhead resistance. That, in my opinion, wouldn't be breached again for a very long time.

Chart courtesy of Telechart,

As a trader, the question then becomes how to play the move and capture the most bang for your buck. There are many individual charts I plan on continuing to play, however I also desire to capture some big swings from the ETF's without the individual stock risk. There are many options available from a pure short on XLE and the OIH to an inverse short using a ProShares Ultra Short (DUG).

As I go through these options with a fine tooth comb, I see that the XLE is more diversified than other ETF's with XOM being 15% and the next highest being Chevron (CVX) at 11%. It has the ones that look very vulnerable such as RIG, Schlumberger (SLB), Occidental Petroleum (OXY) and National Oilwell Varco (NOV).

DUG on the other hand 'seeks to correlate with the DJ O&G Index. As I look into this weighting I see that XOM is 24.4%, while CVX is 10.59% and ConocoPhillips (COP) is 7%. When we look at DUG we're really looking at shorting the major integrated Oils. Considering that XOM looks terrible, this isn't such a bad thing, however it will move slow and could be defended by big institutions and analysts.

The OIH is made up with the following top 5 holdings: RIG, SLB, Halliburton (HAL), Weatherford (WFT) and NOV. At first glance these all look broken, however upon further review many of them have not yet broken big trendlines and I suspect this is why the OIH has yet to really crack below the trendline from mid-2006, which would be around the 150's. Maybe it just needs a little time (probably), but the technical health makes me a bit cautious.

Chart courtesy of Telechart,

For a short, I would favor the XLE due to the more diversified nature. I will initiate this short on a break below $69.00 with a long leash and 10% initial stop loss. If I could not short however and had to use DUG, I would initiate my position by watching the XOM. Anytime the stock is below $77.55, which it is presently, I would start my position in DUG and I would stop out of DUG when XOM recaptured its 50 day moving average.

No positions in stocks mentioned.

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