The oil market has seen big swings in the past year. From nearly $150 a barrel just a year ago to a drop down to below 35 in January 2009, it's no wonder the market isn't more volatile. Oil prices have rebounded, but are still nearly 55% below last year's levels.

This year, however, oil on its own has made impressive moves. Doubling the lows set back in January and February, many traders wonder where the next move is. Bulls are saying $150 a barrel will be reached again soon, while Bears argue that this is just a Bear market rally for oil. Where do we see this black gold moving to in the near term?


Chart 1

The first place we need to go to is the extremes. The extremes are last year's high and this year's low. Then take a fib retracement tool and create bands from one extreme to another. Next, look at where the 50% retracement is. The 50% band currently sits at the level of about 78 dollars a barrel. Okay, so we know where the market has huge weekly resistance.

Chart 2

Now let's turn on the daily chart and see what it is telling us. Daily Oil shows the chart in the middle of a W4B opportunity. This is great-it tells us that the daily and the weekly are not only telling us that the path of least resistance is still up, but they both tell us that the 78-80 range is expected. That is currently 8-10 dollars above the current price of oil

From here there are many ways a trader can look to profit from this potential outcome. One could buy futures contracts, but we are talking thousands of dollars margin per contract. Another idea would be to buy the options on the futures, but again this could prove costly for smaller traders.

One idea that might make more sense to options traders is the options on the USO stock. USO is a stock that trades like oil, but in the equity markets. It is very liquid, and costs less to purchase and spread options than a futures contract, due to the leverage and specifications. Thousands of options contracts trade on this underlying every day, making it very popular among oil traders.

Good trading everyone, I am off to the other side of the world for a few weeks so my next update will come to you from Australia!

Tom Gentile
Chief Strategist
Profit Strategies Group, Inc.