While all eyes have been fixated on a gravity-defying stock market — the S&P 500 Index surged to yet another all-time high Thursday — equities haven’t been the only asset climbing into the stratosphere.
Since highlighting the powerful position of crude oil last month, we’ve seen black gold ascend 10% to $108. Of course, the spark that lit the powder keg was breaking the multiyear resistance level at $98 highlighted in my previous post.
Although buying a stock that finally breaches long-term resistance is far from an infallible approach, the significance of it finally penetrating a previously impenetrable ceiling cannot be overstated. The potent combination of short sellers running for cover and sidelined bulls jumping into the fray serves up a massive dose of demand that frequently leads to additional upside following a breakout.
This dynamic has and will continue to play out time and time again in assets across the board, and it sheds light on the knee-jerk excitement incited in traders trained in the art of technical analysis when they stumble upon a stock that is knocking on the door of a pivotal resistance zone.
Click to Enlarge Crude’s recent resurrection has led to an about-face in its relative strength. As shown in the bottom panel of the accompanying chart, after underperforming the S&P 500 for about 15 months, crude finally was able to begin outperforming in early June (black arrow).
Oil’s newfound strength is helping to boost the energy sector, which hasn’t exactly scored stellar gains of late. Year-to-date, energy’s relative performance places it right in the middle of the pack — not leading like financials and cyclicals, but not lagging as much as basic materials or technology.
Click to Enlarge The Market Vectors Oil Services ETF (OIH) is following in crude’s footstep with a breakout of its own. During the past few days, OIH has broken above a major resistance zone that has rejected all prior advances during the past two years.
There are a bevy of individual oil and gas names that look quite appealing, from Exxon Mobil (XOM) and ConocoPhillips (COP) to EOG Resources (EOG) and Schlumberger (SLB), but those looking for continued upside in OIH should consider entering an October 45-48 bull call spread by simultaneously purchasing the 45 call and selling the 48 call for a net debit of $1.50 or better.
The max risk is limited to the initial debit paid ($1.50) and will be incurred if OIH sits below $45 at Oct expiration. The max reward is limited to the distance between strikes minus the net debit, or $1.50, and will be captured if OIH rises above $48 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.