How to Trade the Russia- Saudi Statement: Proshares Trust II (NYSEARCA:SCO), ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO)
Last week we closed an oil short position and secured 20% in gains in a very short time frame. We bought Proshares Trust II (NYSEARCA:SCO) near $80.50 and we sold SCO near $97.25 and it took only nine short trading sessions to do that, but after the gee 20 meeting and the comments between Russia and Saudi Arabia I completely expected oil prices to have spiked as the market opened on Tuesday.
On Monday, when U.S. markets were closed, overseas markets saw significant gains in oil prices on the heels of the joint comments between Russia and Saudi Arabia, but overnight there seems to have been a discrediting of that reaction and interpretation of the joint comment lacks conviction to them actually taking action on supporting oil prices according to market reactions.
Instead of the position that we closed being down approximately 10%, which seemed likely given Monday's overseas action, SCO was only down fractionally.
In large part, this is also discounting the special informal meeting that is taking place in Algeria on September 26 and in turn discounting the probability that any support for oil prices come from that special meeting. This is a very interesting turn of events because the joint comment between Russia and Saudi Arabia, which on one hand would suggest that they are both at the table and willing to take action, instead is resulting in the air being let out of the sails in terms of hopeful production caps, so to speak.
Oil prices have already been on a negative trajectory, ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), which is the trading instrument that we use to determine entry and exit prices for oil, had fallen from over $14.00 to as low as $7.75 before stabilizing at slightly higher levels, but the chart pattern we have identified in UCO suggests that downward path can continue.
Importantly, this observation has nothing to do with a special meeting that is taking place in Algeria, but oil prices typically react well to technical observations and anticipate news.
Although our profit stop in the short oil trade was hit last week and we secured gains, which were solid and especially so given the short time frame in which the trade was on, the chart patterns suggest that if UCO makes a lower low than last week's lows it can progres down even further, below $7.75.
In summary, we consider the relatively muted 2-day reaction to the joint comments that perceiveably initially carried with them impetus to support oil prices more immediately to be a warning buy the market itself that the upcoming meeting in Algeria may not result in an agreement to cap production as previously anticipated.