COM - UCO: Our Technical Playbook For WTI Crude

2023-07-26 11:39:46 ET

Summary

• UCO has climbed from $22.92 based on the price-at-publication of our 26 June article, to $29.06 at the time of writing. This translates into a 26.8% unrealized gain for us.
• We maintain a bullish view on WTI crude over the medium term, driven by a resilient U.S. economy, OPEC+ production cuts, and the Biden administration's commitment to replenishing the U.S. Strategic Petroleum Reserve.
• Our technical playbook for the short term suggests we stay bullish and long UCO, setting a stop loss just under US$76/bbl based on WTI crude.
• Should WTI crude prices fall back under its new trendline support at US$76/bbl or struggle to break decisively above US$80/bbl, we would take profit on our long UCO position.
• Should WTI move higher, we ride the uptrend and watch for signs of exhaustion around the next level of resistance at around US$86.50/bbl.

The recent performance of the ProShares Ultra Bloomberg Crude Oil ETF ( UCO ) has surpassed our expectations, despite growing concerns that China may already be in the early stages of spiraling into a depression.

At the time of writing, WTI crude oil front-month futures were trading at US$79.14/bbl, well above our entry level of US$69.37/bbl when we re-established our bullish view on crude oil exactly a month ago on 26 June 2023 . Meanwhile, UCO has climbed from $22.92 based on the price-at-publication of our 26 June article, to $29.06 at the time of writing. This translates into a 26.8% unrealized gain on our long position on UCO.

Normally, most commodity traders would be tempted to take profit on such a profitable trade, hedge out their risks, and then just sit back on the sidelines waiting for their well-deserved performance bonus at the end of the year.

At Stratos Capital Partners, however, we take a more systematic approach to our trading. Not only do we see little reason in taking profit following a huge move just for the sake of locking in gains, but we also think there are more sensible ways to manage a profitable trade without having to react to emotional cues driven by greed and fear.

To be clear, we maintain our fundamentally bullish view on WTI crude over the medium term. Our bullish thesis remains underpinned by our core view of a resilient U.S. economy, and a tight crude market mainly driven by production cuts from OPEC+ as well as the Biden administration's commitment to replenish a depleted U.S. Strategic Petroleum Reserve.

But for this article specifically, we will present our short-term playbook for WTI crude over the next couple of weeks based solely on technical analysis, and discuss what we think is the optimal way to manage our leveraged UCO trade.

Breaking Above Its Downtrend, Watch For The Retest

Below is a daily chart showing continuous WTI crude futures prices stretching back to the previous peak of around US$123/bbl registered on 14 June 2022. As we can see, WTI crude has been trending lower since, forming a downtrend channel consisting of a series of lower highs and lower lows.

On 24 July, however, WTI crude finally broke above its downtrend resistance to close at US$78.74/bbl. This breakout was confirmed by another positive trading session that saw WTI extending its gain by a further 1.1% the following day.

In the immediate term, we see a good chance of WTI crude retesting its trendline resistance-turned-support at around US$76-$77/bbl , before potentially making a move higher.

This brings us to our ideal profit-taking level for our UCO trade. Should WTI crude prices fall back under its new trendline support at US$76/bbl or struggle to break decisively above US$80/bbl, we would then look to take profit on our profitable UCO position.

The chart below is reproduced from the one we have provided above, but we have added a Fibonacci retracement study stretching from the previous peak to the most recent low.

Coincidentally, our Fibonacci retracement study above shows that our expected retest of the US$76/bbl level would also confirm a failed breakout above the key 23.6% Fibonacci retracement level. Thus, we think our selected take-profit level of US$76/bbl is meaningfully robust from a technical point of view.

Our Fibonacci retracement study also helps to give us some indication of how far the rally is likely to go before we encounter meaningful resistance. Here, we think the WTI rally could potentially stall at around the US$86.50/bbl level. The next resistance would then be around the US$93.50/bbl level.

Prepare To Get Out At US$76, But Ride The Uptrend For Now

To sum up our playbook, we stay long UCO for now and watch out for a retest/pullback in WTI crude prices towards US$76/bbl, where we set a stop loss just under this level.

Should WTI crude prices fall back under its new trendline support at US$76/bbl or struggle to break decisively above US$80/bbl, we would take profit on our long UCO position.

Should WTI move higher, we ride the uptrend and watch for signs of exhaustion around the US$86.50/bbl level.

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