Two Trades: The Next Moves for Oil and Gold
By Jeff Clark
May 1, 2008
Two excellent trading opportunities are taking shape in the market right now...
Back on March 25, I warned you gold was on the way down to test the support of its 65-week moving average. And even though gold is about $100 per ounce cheaper today than it was back then, the 65-week moving average is still another $100 lower. So I'll have to see some more downside in the yellow metal before I'll be interested in stockpiling it.
Gold stocks, on the other hand, are remarkably oversold and overdue for a bounce. If you're looking for a quick trade over the next week or so, then you might look at buying a few gold shares. But don't hang on too long. If gold continues lower – as I expect it will – gold stocks are likely to end the month of May lower than where they started.
A much better trade is shaping up in the oil market...
For the past several years, I've used the energy sector's Bullish Percent Index (BPENER) to help time my trades in oil stocks. A bullish percent index is simply a momentum-based technical indicator that measures what percentage of stocks are in a bullish pattern. It's a pretty good measure of overbought and oversold conditions.
Here's how the BPENER looks today...
Take a look at the far right-hand side of the chart and notice that the BPENER peaked last week up near 90. In other words, 90% of the stocks in the sector were trading in bullish patterns. It's hard to get much better than that. And when it's hard to get better, then it's easy to get worse.
The performance of oil stocks worsened over the past week, and the BPENER is on the verge of falling below 70. This is a critical support area, and breaching it has often set off a flurry of selling in the oil stocks. Notice how the following chart of the AMEX Oil Index (XOI) correlates to the performance of the BPENER...
The arrows highlight the downtrends that get started right as the BPENER drops below 70. We're sitting right on that level now. So if you're looking to jump into the oil sector, then you may want to hold off on those plans for a few more weeks.
And if you're looking for a good trade to profit on the downside, short selling a few oil stocks might be worth a shot.
Best regards and good trading,
Jeff Clark
