- Crude oil long setup with high reward relative to risk.
- Watch for a pullback into the $54 - $52.31 region for a long entry.
- Do not chase price or over-allocate capital to any given opportunity, there are always plenty to choose from.
As active investors we are constantly on the lookout for high reward relative to risk. So much of what we do is playing the proverbial “If-Then” game. If “this” happens “then” it setups up a high reward relative to opportunity to allocate capital. In my last article on crude oil I discussed the potential machinations that could occur, and suggested that IF crude provided a b-wave entry Then it would setup a low risk high reward opportunity to go long. While it failed to provide a deep retrace for the b-wave, the pattern does suggest now that the b-wave has concluded in a shallow fashion.
So, what’s next for the black gold? While we are somewhat torn between the two alternatives labeled on the Crude Daily Chart – below, the white and the green potentials, what we do know from long experience in trading crude oil is that it virtually always goes to extremes. Going to extremes in this case would favor the white count, with a move up to 63.76 – 73.01, followed by an enormous drop, dramatic in size and similar in scale to the drop that occurred in Q4, 2018, down to the 38 region. Adding further to this notion is that it would be highly unusual for a 2-month drop into late 2018 to be the completion of a retracement against a move up that started in February 2016 and took two and a half years to complete.
Either way, what we do know is that for a significant period of price action both potentials move in the same direction - up. On this basis, we are looking for long opportunities in crude, and provided it at all times remains over 51.23, upside price targets are 63 – 73, with the higher side of this target region now being much more probable.
Note on the 60-minute chart that the move off the b-wave low, or 51.23 is now completing what can best be counted as a non-overlapping diagonal up. Typical in diagonals is a deep retrace. Therefore, once the move up off the 51.23 level completes, we’ll be watching closely to confirm that a retracement fib against this move up holds to go long crude in the 54 – 52.50 region for a move up to 63-73, and with the 72/73 region now becoming the more probable price target.
So, IF crude can complete the move off 51.23 and pullback into the 54-52.50 region, then it setups up a long entry with stops at 51.22, thus risking $2.00 to make $10, and more likely $20. That’s at worst a 1:5 risk vs. reward, and at best a 1:10 risk vs. reward.
Using a non-leveraged approach, buying shares of United States Oil Fund (USO) one is risking 4% to make 19% - 38%. By allocating 15% of one’s investment capital to this single opportunity would risk .60% for the potential to provide a 5% increase in overall capital. Taking a leveraged ETF approach using shares of Proshares Ultra Bloomberg Crude Oil (UCO) is another alternative for those who are more aggressive with their capital.
So many times I see investors identify an opportunity and go all in. In truth, there are many “If-Then” opportunities that present themselves throughout the year. Being an active investor means actively monitoring a host of scenarios similar to the one I discussed herein with crude oil, and when the platter gets set, then take advantage using a low risk posture to accumulate for super-performance on an annual basis. If you are seeking to accumulate annual returns of 25-30% per year, you simply do not have to over allocate to any given scenario, and provided crude gives us the appropriate entry, this one trade can provide 20% of your annual performance by only allotting 15% of your capital for a relatively short span of time.
Crude is setting up for higher. IF it provides the right low risk entry, Then it’s a great opportunity to allocate a portion of capital to contribute towards annual super-performance.
It is not necessary to bet the farm on any given investment or trade opportunity. Active investors should at any given time be monitoring a host of opportunities to add to overall annual performance on a low risk to reward basis.
IF crude provides a reasonable retrace against the b-wave low move off the 51.23 level, then it qualifies for a high reward relative to risk opportunity worth considering a long position in crude oil futures or shares of USO or UCO.
Shortly, we will be introducing a Marketplace service called The Active Investor, for those following the S&P 500, gold, crude oil, natural gas, Bitcoin, and who are looking for a consistent flow of high reward relative to risk opportunities to allocate capital can follow our analysis. I will keep you abreast of further developments.