Is The Weakness in Oil a Buying Opportunity?
Crude oil had a difficult month and is down approximately 20% from its high made on July 6th. You can blame it on uncertainty over Covid outbreaks combined with a strengthening U.S. dollar, after all, it does make sense. But I prefer to analyze the price behavior.
You can see how price stalled out near the 2018 highs near $75 that kicked off a two-year bear market for crude oil.
Is this the beginning of the end for oil like we saw in 2018 or is this a correction in a larger bull market?
Unfortunately, no one knows for sure. You can find great arguments from bulls and bears in pretty much any market. So, if you want to confirm your bullish or bearish bias you can easily find an argument to support it.
For me, the markets are about finding the best reward to risk situation and positioning accordingly while managing my risk.
Right now Canadian oil and gas stocks -XEG.TO (TSX Capped Energy ETF) is trading just above an important area that has supported price since February.
By ignoring the noise or the bearish and bullish arguments and focusing on price, you can see that entering near $7 offers a great place to know when you are wrong on the trade. I know most people prefer to look at how much money they can make but understanding your risk is far more important.
If this is just a correction for Canadian oil and gas stocks (XEG.TO) and the price heads higher from here, then the old highs above $9 would be a reasonable first target.
If the price closes below $7 and moves lower, energy stocks are probably not a good place to be.
So, at the current price of $7.50 your upside is approximately $1.5 vs $0.5 downside which is a very respectable 3 to 1 reward to risk ratio.
By removing any bias and emotions from your trading decisions and focusing on price, you have a better chance of success because price doesn't care what you think. It's never wrong.
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