The Fun Money has been made in OIl; Now focus on the NASDAQ

May 24, 2016, 10:02 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The fun money has been made in the oil space, and from here it is likely to be much more of a struggle, but there’s something new to focus on too. 

Stock Traders Daily began a strategy for clients when oil prices were bottoming, and this e-mail serves as the bookend to that phase of the strategy.  In addition to initiating a trading strategy, Stock Traders Daily also recommended to investors that they buy ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) when it was trading near $7.00 per share, so there was something there for both investors and traders, but from here that may change.

We expect oil prices to stall, in fact they may not be able to press higher beyond $50.00 in a meaningful fashion, but that doesn’t mean they will decline meaningfully either.  Over time, we do expect oil prices to press higher, but over a medium term time frame, which Spans months, we would not be surprised to see oil prices basically fall flat around current levels.

Based on ever changing news events, we need to expect oil prices to be volatile, supply disruptions will cause oil prices to increase, demand issues will persist, and although everyone thinks OPEC is no longer able or willing to influence prices, they certainly are and certainly can, so don’t count them out, but all this is going to do is influence volatility in a much more confined range.

Importantly, if supply disruptions reversed themselves immediately the first reaction would be for oil prices to fall, but there are so many bullish bets on oil, and those players can see balance coming in the space in the months ahead, so they are unlikely to relinquish their positioning even if immediate supply imbalances resurface, and unless they begin to sell and stop supporting the market oil prices are unlikely to fall.  It would take quite a bit for them to start selling, and nothing is on the immediate horizon for us to expect that to begin.

A more confined range is exactly what is causing us to say that the fun money has been made.  We are expecting oil to trade in a tighter range, and although volatility comes with the territory, we do not expect investors at this level to realize substantial rewards for a considerable amount of time.  In fact, investors at these levels are late to the game.

For traders, because oil is volatile there is money to be made in this space even with this ceiling and the expected tighter range, but expectations need to be moderated.  Instead of expecting follow through, you need to take money off the table fast, and you need to be trading in both directions if you do it at all.

However, our choice was to transition from oil.  Our trading strategy is called LETS, which is an acronym for Leveraged ETF Trading Strategy, and although we have appreciated the volatility and the rewards that came with it as we traded oil in conjunction with UCO and Proshares Trust II (NYSEARCA:SCO), our identification of a tighter range has suggested to us that we move on from the oil space and focus instead on the stock market.

From here, our LETS strategy will be trading the NASDAQ in conjunction with ProShares UltraShort QQQ (ETF) (NYSEARCA:QID) and ProShares Ultra QQQ (ETF) (NYSEARCA:QLD).

The fun money, in our opinion, will now come from trading both log and short the NASDAQ.

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