If you believe that crude oil ($WTIC) is dirt cheap and the primary trend from here will be higher, then one simple trading strategy is to own the XLE (Energy Select Sector SPDR). Over the years, the correlation between the two is strong - and perhaps obvious. Since the 2000-2002 bear market ended, the XLE has really one suffered through two bad years. The first began in mid-2008 and we're currently in the second, which began in mid-2014. While many analysts are calling for years of cheaper crude oil, the past suggests this is nothing more than a fantasy. We've seen the bottom fall out of crude oil prices in the past, only to surge higher again. And when oil prices surge, the XLE performs extremely well. I've broken down the last 15 years on a monthly chart so that you can see the relationship between the WTIC and XLE:
Based on the above crude oil test of price support just below $40 per barrel, it appears as if the XLE is a strong reward to risk trading candidate. Crude oil prices have tumbled over the past 15 months, taking the XLE down for the ride. In the process, the XLE came very close to reaching what looks like nice channel support. A move below 55 would negate that, but the potential reward to the upside seems quite high from current prices.
Happy trading!
Tom
