Seasonal Short on Oil

09/08/2016 9:00 am EST

Focus: FUNDS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Seasonally speaking, crude oil tends to make significant price gains in the summer; however, towards mid-September, we often see a tendency for prices to peak out, as the driving and hurricane seasons begin to wind down, observes Jeffrey Hirsch, editor of Stock Trader's Almanac.

Shorting the February crude oil futures contract in mid-September and holding until on or about December 9 has produced 22 winning trades in the last 33 years.

This gives the trade a 66.7% success rate and theoretical total gains of $108,270 per futures contract.

Following three consecutive years of losses, this trade has been successful for four years straight. Last year’s trade resulted in the fourth largest profit yet as crude’s decline resumed in mid-October.

Regardless of the nearly 100% rally in price from the February lows to its highs in mid-June, many of the fundamental issues that triggered crude’s slide from $100 per barrel in 2014 remain in place.

Global growth is still anemic, the US dollar is still hovering around multi-year highs and OPEC is still pumping as much as possible in a bid to shake out higher-priced production and maintain market share.

Downside could be limited this year as lower prices are keeping production, outside of OPEC, in check and demand has been firm, at least according to weekly EIA data.

ProShares UltraShort Bloomberg Crude Oil (SCO) is the preferred vehicle to take advantage of seasonal weakness. SCO’s benchmark index is comprised entirely of crude oil futures contracts.

SCO is designed to return 200% of the inverse of the daily move of this index and has approximately $200 million in assets. Its expense ratio of 0.95% is about average for a leveraged, inverse ETF.

Crude oil’s recent weakness has resulted in a brisk rally for SCO. As a result, stochastic, relative strength and MACD Buy indicators are all positive.

SCO could be bought on dips below $99.00. If purchased, an initial stop loss at $88.00 is suggested.

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By Jeffrey Hirsch, Editor of Stock Trader's Almanac

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