On Friday, the Dow suffered its worst drop in a month, as oil prices surged on the surprise U.S. killing of top Iran general Qasem Soleimani in Baghdad.
The directive from President Trump was met with threats from Iran, with Defense Minister Amir Hatami reportedly saying “a crushing revenge” on the U.S. is imminent.
Trump also caught some grief over this tweet from November 2011…
… but that’s none of my business, as the kids say.
U.S. oil prices surged above $63 per barrel, and earlier hit their highest point since April.
Black gold just came off an especially strong fourth quarter, too, after OPEC announced big production cuts, and after September drone strikes on Saudi Arabian oil facilities.
More recently, Baker Hughes said the number of active U.S. oil rigs dropped again last week, and a third straight weekly drop in domestic crude inventories also helped bolster oil prices.
All of the above pointed to lower global oil supplies – and even us peons without an economics degree understand how supply/demand impacts prices.
With geopolitical tensions between the U.S. and Iran rising, investors sought safety in gold – a tangible asset that can be hidden under the mattress and exchanged for food & water during the armageddon.
Of course, I don’t think the world is ending, and I’m not trying to be flip – just explaining why gold is thought to be a “safe haven” asset during times of uncertainty.
All of that said, today I want to dive into two exchange-traded funds (ETFs) on my radar after Friday’s news, and one oil stock sending up a bearish signal on the charts.
Gold ETF is Way Overbought
The SPDR Gold Shares (GLD) ETF typically moves in tandem with gold prices.
With the price of gold flirting with six-year highs now, GLD has ended the last 10 of 11 sessions in the black, and is now testing its September peak.
GLD saw its highest daily volume since early November on Friday, and is now throwing up at least two overbought signals.
First, the ETF’s Monday Flow Index (MFI) is at its highest point since June.
When an MFI goes above 80, it suggests a pullback could be on the horizon. (On the other hand, when an MFI moves below 20, it’s considered an oversold signal.)
In a similar fashion, the fund’s 14-day Relative Strength Index (RSI) is also at its highest point in more than six months, at nearly 82.
A stock or ETF is considered overbought when its RSI is above 70.
Those signals in June preceded a short bout of consolidation for GLD, so it will be interesting to see if that happens yet again.
Oil ETF Lights Up
Moving on, the United States Oil Fund (USO) tends to move with crude prices.
The ETF on Friday saw its highest daily volume since mid-November, and its 14-day RSI is in overbought territory for the first time since mid-April.
That signal preceded a notable sell-off for USO.
I also found it interesting that Trade Alert data showed the oil & gas sector saw 200% more options volume than usual on Friday, with 81.6% of @ENER options volume trading on the call side.
That indicates a much healthier-than-usual appetite for bullish options trades, indicating many speculators may expect even more upside for oil prices.
Oil Stock Headed for Support Breakdown
As alluded to earlier, one oil stock caught my eye on Friday: Exxon Mobil (XOM).
While XOM shares didn’t end Friday higher, they appeared on a screener for a descending triangle pattern.
There are three things I look for to identify this pattern:
- The shares are already in a longer-term downtrend
- A “baseline” of support
- A series of lower highs
The baseline and the line connecting lower highs should be able to connect at some point, forming an acute angle.
Once the stock breaches the baseline of the triangle, it typically resumes the longer-term descent, making this a bearish pattern.
As you can see, XOM is fighting a pretty strong downtrend here, and it sure looks like it’s headed for a support breakdown around $67.
Now, I’m not saying I’m putting on an official trade here — if I did, I’d let you know in your normal Weekly Windfalls communications and in my live trading feed.
But let’s look at a theoretical bear call spread trade, for sh*ts and giggles.
Traders expecting another retreat from XOM shares could start by selling the weekly 1/17 70.50-strike call for the bid price of 90 cents.
That means they expect the stock to stay below $70.50 in the near term — or at least until the options expire on Friday, Jan. 17.
They could then buy that leg of “options insurance” by purchasing the weekly 1/17 71.50-strike call for the ask price of 32 cents.
That means the bear call spread was opened for a net credit of 58 cents (90 cents received minus 32 cents paid) — the most they could make on the trade.
Should XOM move above $71.50 (the bought call strike), losses are limited to just 42 cents (1-point difference between bought and sold call strikes, minus the 58-cent net credit).
Breakeven on the trade would be $71.08 (70.50 sold call strike plus net credit of 58 cents), so as long as XOM stays below that level in the options’ lifetime, our theoretical investor would stand to make money.
In conclusion, I’ll be keeping an eye on the developments in the oil markets this week, and I’ll continue to run scans for both bullish and bearish trade ideas.