Short Term Profits on an Oil Bounce (XLY, SPY, XOM, USO)

We have an open trade that requires your attention.

And depending on what kind of personality you have, it could go in two entirely different directions.

It was a trade we opened in mid-August in a letter called The Outperformance Game. There, we spoke about the lack of excitement in the consumer discretionary sector; a corner of the market that generally fares well when consumers are confident and the economy is humming without worry. At that time it wasn’t the case, but we suspected the situation would change, and the discretionaries, as represented by the Select Sector SPDR Consumer Discretionary ETF (NYSE:XLY), would outperform the S&P 500.

The trade consisted of a long XLY CALL purchased with funds garnered from a short SPY CALL ( the SPDR S&P 500 ETF).

And what happened?

 

We bought the XLY December 69 CALLs for $1.33 and sold the SPY December 205 CALLs for $1.44, pocketing a credit of $0.11 per pair traded.

And today the XLY’s are trading for $2.30, while the SPY’s are fetching $2.55.

Take a look at XLY’s chart –

xly122
The technicals show a tremendous run-up to new highs posted last Friday (in red), and a sharp decline on bigger volume during Monday’s session.

We give great weight, too, to the RSI 80 read that was struck last Friday (in blue), and hold it largely responsible for the decline in Monday’s follow-up action.

In short, we believe the highs are now in for XLY for at least the next month, and certainly until our options expire on the 20th of the month.

Two Vastly Different Recommendations

 

And that leads us to recommend two very different courses of action depending upon your character.

1. For those more faint of heart, we highly recommend you close out the trade today, despite the fact that expiry is only two and a half weeks off, and settle for a loss of $0.14 on the trade (255 – 230 – 11).

Why? Because XLY could very easily close out-of-the-money and SPY just inside, and you would register a loss of more than fourteen bucks if you held on until then.

Do You Know Yourself?

 

Be that as it may, we now issue a second recommendation because not all investors are alike, and the second avenue (below) might be preferable for those, like us, who are willing to assume an added measure of risk.

And it goes like this –

2. For those who consider themselves partisans and gunslingers, we suggest selling only the long XLY CALL, pocketing the $2.30 (along with the $0.11 credit initially obtained) and leaving the short SPY CALL to wither on the vine.

Why? Because we also see a broader pullback in the making here and believe there’s a good likelihood that the SPY 205s will end up out-of-the-money when the bells of expiration come tolling on the 20th.

And what’s the risk?

 

The risk, of course, is that the indexes march higher and you close out your short SPY CALL at a loss that’s greater than the $2.41 you’re about to take in.

And how do we manage that risk?

watson

A: If the S&P 500 hits new highs, we shut her down.

That’s it?

That’s it.

S&P 2075.76

 

Because if the indexes manage to score new highs at this point, it’s very likely we’ll see them forge even higher, despite all the signs and portents and omens and Ouija board dancing that we regularly do in order to bring you these super-cali-fragilistic recommendations.

That’s right. If we hit new highs, it will all have been for naught. We’ll have been wrong. And you may end up taking a loss on the trade.

Consider it well.

As for us, we’re leaving the SPYs in place. Our bet, in essence, is that new highs will not be made in the next thirteen trading sessions, though we’re eyeballing S&P 2075.76 very closely.

Good luck.

A New Month, a New Trade, and a Rash in the Pits

 

crude

Pee-yewww…

 

They don’t call us the MAD Magazine of financial analytics for nothing!

Anyway, we’re looking at a means of scoring off the latest insanity in the crude oil pits of late, where a rash of selling has sent the sticky liquid lower by some 40% from her mid-June highs.

And our feeling is that the time is right to step in and make some cash.

Let’s start by looking at the United States Oil Fund ETF (NYSE:USO) for the last six months –


uso122

The picture here is of a nightmare now drawing to an end – even if only temporarily.

The brush with RSI 20 (at bottom, in blue) is a clear sign that for the moment the sellers have been put on guard, as many technicians will be entering long positions. Indeed, Monday’s trade saw a great many buyers forcing USO’s price higher (bulls eyes).

The spike in volume speaks to a capitulatory cascade, as new hands stepped in over the last four sessions to wrest USO shares from the hands of panicked sellers.

But it’s not with the price of oil that we intend to do business today. Rather, with the world’s largest publicly traded purveyor of said gunk, Exxon Mobil Corp. (NYSE:XOM), whose shares have also taken a beating of late, though not nearly the pummeling we saw in the commodity itself (above).

Look at her chart –

xom122
If the oversold USO chart spoke of the potential for a turn higher in crude, Exxon Mobil’s technicals say it’s already happened.

We lean heavily on the bullish engulfing pattern (enlarged in black) as evidence that a five-month decline has now come to an end. This Japanese candle formation is very reliable, particularly when it comes on higher volume – as we have now.

That the October lows (in red) held despite crude being in a far worse position, also speaks to the strength of XOM shares.

We would not be surprised to see an immediate bump higher to the long term moving average at 95.

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[mepr-rule id=”204″ ifallowed=”show” description=“options_trader_elite_members_only”]
Options Trader Elite recommends you consider 1) closing out your XLY/SPY trade as specified above, and 2) selling three (3) XOM December 87.5 PUTs for $0.44 each and buying a January 95 CALL for $1.33. Total debit on the trade is $0.01 per quartet traded.>/strong>
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Options Trader Elite recommends you consider 1) closing out your XLY/SPY trade as specified above, and 2) selling three (3) XOM December 87.5 PUTs for $0.44 each and buying a January 95 CALL for $1.33. Total debit on the trade is $0.01 per quartet traded.
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With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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