Sunday, January 14, 2007

Oil? or No Oil?

Cal Trader writes that he thinks oil is becoming a buy. I do too and have talked about it several times this past week or so - but I bring it up again because he focused on CHK (among others) and CHK just happened to show up on my newest favorite filter - Donchian Channels - this weekend. Here is what that looks like -

I showed you OIH earlier today on the weekly charts - here it is on the daily's with Donchian Channels

And then XLE from the same space -

The number one stock coming out of the Donchian Channel this weekend was HAL and it too is part of the energy space and it is a prominent (top 10) member of both XLE and OIH. Here is what it looks like -

And yes, I know grasshopper - they all look exactly the same. That is probably not an error.

Now I've left you an excrutiatingly difficult question to answer - which one to play?

Well there is no simple answer but there is an answer -

Let's say that your account can only buy 100 shares of any of the 4 issues - you would go for the one that would pay the most in the shortest time which, based on the average true range would be OIH. But otherwise let's say that you have 29000 bucks and you will use it all to buy as many shares as possible of one of the four - in that case you would go with HAL. That's because simply based on the numbers of shares and the expected return (ATR) you would achieve a higher net with HAL. OIH of course would be in second place.

Well that was easy wasn't it - actually there are some other considerations such as that you might be better off with a fund rather than an individual stock and so on and so forth. So actually you would be best served by reviewing your circumstances at the time of the buy and acting appropriate to your situation.

This is not a recommendation to buy any stock - it is simply a discussion of one sector and a lesson in how stocks reflect ETF's or vice versa.


Bullish Jim said...

I just added to my COP core position on Friday as a matter of fact. If the formula from 2006 continues you can buy the oil stocks whenever you start to hear the talking heads yapping nonstop like they are now about the oil rally finally being over. That would have been every three months or so in 2006 (March, June, and September). Hmmm, it's been about three months hasn't it? I don't recommend it to anyone but I'm considering a call option spread (buy a call and sell a call with a higher strike price) in a number of different oil stocks to try to catch the next bounce.

Marlyn Trades said...

I'm just asking but why COP? - It's a good company certainly but I like to know why people select one stock over another one.

Also if you do decide to make an option play why not just go with OIH and get the best of the breed in that manner?

Bullish Jim said...

I could certainly go with OIH. I have no scientific reason for going with COP other than it is large and predictable versus the price of oil and it has worked for me in the past. The COP chart for the past year has also been pretty easy to play; it's either in a steep uptrend or a steep downtrend and nothing in between. I'm checking out OIH options as we speak.

I also like the refiners here. I've been long HOC off and on for more than a year and I find it interesting that the refiners haven't been hammered nearly as much as other oil stocks since late November.

Marlyn Trades said...

The refiners control the supply - they if they lose money they aren't doing their job very well. They are almost like the diamond cartel except more important to the economy.

Bullish Jim said...

Good analogy. Refiners basically have a money printing machine...


Oil is still king.