Monday, August 2, 2010

Bulls Bid-up Black Gold

Though equities were bid-up across the board in Monday's surge, the oil patch experienced notable relative strength. While there are a variety of charts I could cite to adequately display oil's bullish price action, I've settled on the Oil Services HOLDRs (OIH). Since imploding amidst the BP debacle in April and May, the OIH has formed a textbook ascending triangle over the past two months. With the successive higher lows as well as tight basing action in recent weeks, bullish footprints had already begun to appear prior to Monday's pop.

[Source: MachTrader]

When entering directional option plays I'm continually on the lookout for strategic entries to increase the likelihood of success. Of the plethora of bullish price patterns in the technical analysis realm, breakouts are one of my bread and butter. In anticipation of further upside in OIH, suppose I entered a bullish risk rocket by purchasing 100 shares at $107.35 and two Sept. 115 calls for $1.95 apiece.

With an ATR of $3, my initial profit target would be around $110.35. Upon reaching the target I could dump the shares of stock and roll the 115 calls to either a vertical call spread or a call butterfly. If executed correctly the adjustment should take the original risk capital off the table.

For those interested in more information on breakouts you can check out this short breakout video I drummed up from the archives. I posted it in early '09 just after starting Tyler's Trading.

For other related posts, readers can check out:
Christmas Musings and a Trade Journal
Fire Up the Boosters
Evolution of a Bullish Risk Rocket