A crude awakening

Names like Santos, BP, Schlumberger, and Woodside Petroleum are finding buyers and this sector is hot. I remain an energy bull and outside of meme stocks, I see this as the place to focus on especially for those who have a preference to trade from the long side, rather than two-way (long and short).

Petro-currencies are naturally outperforming, notably the CAD has been getting attention vs the USD, JPY and AUD. USDCAD is looking like it wants to revisit the 1.2000 level – the risk for USDCAD shorts being Friday’s US payrolls. CADJPY is one for the radar and a closing break above 91.04 should get the momo players out.

CADJPY 4hr chart

(Source: Tradingview)

As a CFD trader, I want to buy strong and sell weak. I'm cautious of the risks of buying into an overly loved, and extended move, but the edge in short-termism comes from moving in alignment with the flow of capital. Momentum trading is therefore ideal for CFD trading, although I also feel strongly about mean reversion strategies. However, in this situation I want to try and tilt the odds in my favour where I can and reading sentiment and flow are key – right now, sentiment towards crude is positive but not over-loved and energy equities are not over owned either.

SpotCrude is now the highest since October 2018 and on the daily chart is holding the positively trending 5-day and 20-day EMA and finding buyers on any pullbacks. I can take the timeframe down into 15 or 30 minute charts and trade momentum scalping strategies, but my first rule in any momentum strategy is that I want the daily candle to be green and price above the 5 and 20-day EMA and this defines a bullish bias even into the lower timeframes.

The risk v reward trade off matrix

Can we get $70 US crude? I guess this is the target now, although for me targets are loose and preferably driven by the reward area (in the risk to reward trade-off). For me, it’s about trying to get at least a 2R, which means I can be right 33% of the time and still make money – holding winners should always be far harder than cutting losers.

So, the idea is to understand where in an ideal world I need to target, given my risk. This is defined by my stop loss, which then also dictates my position size – where the risk is defined by the volatility in the market.

SpotCrude 4hr chart

(Source: Tradingview)

Anyhow, price is moving higher on the higher timeframes and as we see from the series of RSI’s, the current standing is not at extremes. One aspect of concern I do have and one which I will monitor is the 4-hour chart (see above) where we see price finding supply into $68.80 and we see divergence (price vs RSI), which indicates risk of a modest reversal – one I would use to work longs into.

On the fundamental side, the futures curve is in solid backwardation – this means future contracts trade at a discount to spot. This indicates a tightness in the underlying market and incentives long positions as futures traders can roll into forward contracts at a discount upon expiry.

We also know there has been somewhat of a slowdown in the Iranian nuclear talks, so the market has pared back it's pricing of a near-term agreement to revive the 2015 nuclear deal. Amid a backdrop of positive demand improvement, with the Saudi’s talking about “clear signs of improvement”. We've also seen the International Energy Agency (IEA) detailing that US consumption may hit pre-pandemic levels.

So, Crude is hot at the moment, as are energy equities and the likes of the CAD. While holding a long bias on energy stocks, I would consider long US financials into Friday’s payrolls as a hedge or a barbell strategy effectively to capture the risk of a hot payrolls report. Ready to trade the opportunity?