A Swing Trade In Crude Futures That Makes Sense

Sometimes, trading is more about the trades that you don't take than those that you do. I have told myself that many times over the last few weeks when it comes to crude futures. Back on March 18th, I wrote in these pages that I expected to see the volatility that was around at that time continue, but over time, a bearish bias began to emerge as high oil prices proved to be the best cure for high oil prices. That worked out pretty well. Crude did indeed jump around for a week or so after I wrote it, then began to drop, following a Presidentially ordered release from the Strategic Petroleum Reserve and declarations of intent to up output from integrated and E&P companies in the U.S.

From a trading perspective, however, getting that call right didn't help. The moves over the last three weeks have been driven by headlines rather than observable fundamentals, making it impossible to predict what would come next, while also negating the value of any chart analysis. Price doesn't react to lines and squiggles on a chart when it is being driven by how a war is going and by the prospects for that war escalating.

So, while I have been watching crude closely, I have been doing basically nothing from a swing trading perspective…until now.

What we have lacked to this point but have right now is a classic chart setup that allows for a trade that can benefit from movement in either direction or, at least, can be set up to make covering any losses likely should you end up on the wrong side of a headline.

The opportunity comes from the fact that crude futures (CL) have just tested the low established on March 15th, following the rapid drop after crude got up above $130. That formed a double bottom that now looks to have some significance and, with CL at around $96 as I write, that can be used as the basis for a bracketed trade strategy that I have talked about in these pages before and like to employ when the chart says it makes sense.

It starts from the assumption that the established support, which is actually at the March 15th absolute low of 93.53, will hold. That means buying CL and using that level off which to set a stop, say at around 93.40. The target would be a return above $100, say to around $105, setting up a potential profit of $9 versus a potential loss of $2.60. That is an attractive enough risk/reward ratio to make the trade appealing on its own, but there is another thing that can be added that adds to that appeal.

If we start from the opinion that the double bottom now has major significance, then a break of it will probably come as the result of some bearish news, in which case crude would move considerably lower after the break. For that reason, I would favor a stop for twice the size of the original position, forcing a transition to a short on a break down. The actual trade I have on is +2 at 95.85 with a GTC order to sell 2 at 104.50 and a GTC stop loss order to sell 4 at 93.40. If the stop is triggered, I will set a stop for the new, short 2 position at around 93.80-94.00 and establish a target for the short at that time.

As usual, all of those numbers are starting points and not set in stone. If volatility recedes and we move a little higher then stall, I will be happy to take a much smaller profit, for example, but for now, I am just happy to have a setup that finally makes sense!