UPS Could Rally if Oil Stays below $55

It could break above its 50-day moving average

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This morning I am recommending a bullish trade on United Parcel Service, Inc. (NYSE:UPS), the package delivery company.

The transportation sector, as represented by the SPDR S&P Transportation ETF (NYSEARCA:XTN) has recovered nicely from its December lows, and UPS has followed. I think there’s one major factor at play.

Falling Oil Prices

I mentioned in another trade recommendation that oil prices are low because of increased production and falling demand. Well, thanks to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and Russia, prices have recovered slightly, as you can see in the chart below.

Daily Chart of Crude Oil Futures — Chart Source: TradingView

But in that chart you’ll also see some resistance at around the $55 level. When I recommended a bearish trade on Energy Select Sector SPDR ETF (NYSEARCA:XLE), I said that production cuts won’t protect oil prices against slowing demand.

Considering this overhead resistance at the $55 level, I don’t expect oil prices to break out in the short term.

Lower oil prices help transportation stocks like UPS cut their costs. They spend less on fuel for their trucks. If oil prices remain low, UPS’s share price could keep going up.

Overcoming Resistance

 

Looking at the daily chart, we see some resistance at UPS’s 50-day moving average (MA). The stock gapped up on Friday and tapped its 50-day MA yesterday before closing just under $103.

Daily Chart of United Parcel Service, Inc. (UPS) — Chart Source: TradingView

Even as oil prices recovered in January, UPS has continued rising. I think there is a strong fundamental outlook for the stock, and if it overcomes resistance at the 50-day MA, it could keep going. We could make a big profit off a bullish play, so I’m recommending a calendar call debit spread.

Using a spread order, buy to open the UPS Mar. 15th $105 call and sell to open the UPS Feb. 15th $106 call for a net debit of about $1.00.

A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

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