Earlier today my friend Carter Braxton Worth from Cornerstone Macro research tweeted the following about Crude Oil’s recent price action:
The April 9th down gap in WTI Crude has been filled. We would initiate shorts now, as per the June 5th judgment. pic.twitter.com/6tHWNRjCAk
— Carter Braxton Worth (@CarterBWorth) June 23, 2020
From a technical perspective, Carter thinks oil is a short here… I would take it a step further and look at oil stocks as a way to express a bearish view via the S&P Energy Select etf, the XLE, where Chevron (CVX) and Exxon (XOM) make up 45% of the weight.
The chart of the XLE has some fairly instructive lines, last month rejected after a 100% rally from its March lows at its 150-day moving average (yellow line, using 150 as that is Carter’s fav long term avg) and has mild support at its 50-day moving average (purple line), but below the uptrend from the March lows. The chart looks heavy.
So what’s the trade? If I were inclined to play for a move back to the mid-30s in the next month I would consider buying a near the money July put and look to spread by selling a lower strike put of the same expiration on the first leg lower, reducing the premium at risk.
WIth the etf at $39.50, the July 31st 39 put is offered at $2, or 5% of the etf price, if I were to buy that playing for a move lower, my break-even is down at $37, 6.3% lower.