Stop Trading Oil: ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and Proshares Trust II (NYSEARCA:SCO)

June 14, 2016, 09:32 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Stock Traders Daily is continuing to advise its clients to avoid trading oil.

Although trading oil through our LETS strategy has produced returns of approximately 86%, the technical trading patterns that drove that strategy to success are turning haphazard and relatively undefined channels which could cause deterioration and unreliable technical indicators. 

In that strategy we were trading ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and Proshares Trust II (NYSEARCA:SCO), so both the long and the short side of oil, based on near and midterm technical observations that provided timing indicators.  Predominantly, those technical indicators offered exceptional entry and exit levels, sometimes very fast, and that created an environment in which greed dominated sentiment in the space, and even in our strategy.

But greed was not isolated to our strategy of course.  According to OPEC and the other reporting agencies there were more bullish bets placed on oil over the past few months and therefore more bullish bets being carried, than ever before in history.  Generally, that is a red flag, it tells us that buyers have already come to the table, but it also does something else and it is this something else that caused us to stop trading in the space.

Specifically, I’m talking about over exuberance.

Emotions should never play a role in this business, but it is crystal clear when so many bullish bets are levied emotions start to run high.  Greed dominates the spectrum, and when that happens technical channels that might otherwise be reliable start to break and haphazard trading environments surface which cannot be defined clearly by technical trends on the near-term and midterm basis.

It is exactly that which caused us to transition from trading UCO and SCO within our LETS strategy.

While carrying with it the approximate 86% gain that came from trading oil in the first part of the year, this strategy has nabbed transitioned to trading the NASDAQ in conjunction with ProShares UltraShort QQQ (ETF) (NYSEARCA:QID) and ProShares Ultra QQQ (ETF) (NYSEARCA:QLD) using the exact same technique.  This strategy is not an oil based strategy, but a strategy based on a specialized technique of cost basis improvement driven by an underline bias.

Where our bias was long oil early in the year as oil was bottoming, our current bias the short the market, especially after the tests of longer-term resistance that happened last week.  We will not plug our nose, we will trade long and short from time to time, just like we did with oil, and if this market so happens to increase instead of decline we will adjust with it, but as it stands today our bias is short and it will remain that way for the foreseeable future with occasional cost basis improvement swaps taking place.

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