After a notable Santa Claus rally, the stock market has been rocky the past couple of days, after the U.S. took out a top Iranian general.
In response, Iran said it will no longer heed the uranium enrichment limits set by a 2015 nuclear agreement.
The tense geopolitical climate has bolstered the price of gold — considered a “safe haven” asset during rocky times — and concerns about oil supplies have boosted the price of crude.
So today, I want to dive into one technical indicator that helps you hunt stocks on the verge of a possible bullish breakout… and look at an oil stock flashing a buy signal.
I recently illustrated how I use the descending triangle pattern to stalk potential bearish trades.
On the flip side, the ascending triangle is a pattern that typically precedes a move higher for a stock or exchange-traded fund (ETF).
There are three things I look for to identify this pattern:
- The shares are already in a longer-term uptrend
- A “ceiling” of resistance
- A series of higher lows
The resistance line and the line connecting higher lows should be able to connect at some point, forming an acute angle (like a triangle!).
Once the stock tops that line of resistance, it typically resumes the longer-term uptrend, making this a bullish pattern.
But, as usual, I like to teach with visuals…
Oil Stock Hinting at a Breakout
Wall Street is expecting the U.S.-Iran tensions to weigh on oil supplies, which makes the cost of crude more expensive (due to basic supply/demand economics).
Several oil-and-gas stocks have risen with black gold prices, including ConocoPhillips (COP).
As you can see on the chart below, COP stock has been making higher lows since late August, with a line of resistance emerging in the $63-$64 area.
COP recently broke north of that region, and is now testing territory not charted since April.
The one thing that makes this pattern less certain, however, is that ConocoPhillips shares haven’t been in a longer-term uptrend.
The stock was in rally mode from early 2016 to its October 2018 peak, but since then has retraced much of those gains.
In fact, the pullback to around $50 in August represented a 61.8% Fibonacci retracement of the aforementioned rally.
If this pattern persists, COP could find another potential ceiling in the $69 region. This area represents a 23.6% Fibonacci retracement of that rally, and acted as a lid for the oil stock in early 2019.
But with the security currently trading around $66, there’s some wiggle room before that potential roadblock is hit. And the $63-$64 area that was the “ceiling” on the triangle above could now switch roles to act as support for COP.
A Hypothetical “Casino Play” on COP
Now, I’m not saying I’m putting on an actual COP trade in Weekly Windfalls, but I’d like to break down my thought process if I were putting on the trade, for educational purposes.
For those of you who don’t yet know, paid subscribers to Weekly Windfalls are treated to several trades per week, all of which are based on the “casino strategy.”
The vertical credit spread is called the “casino strategy” because of the high rate of success — it tends to make money about 70% of the time!
That’s because it can profit one of three ways:
- If the stock moves in the anticipated direction
- If the stock stays stagnant
- If the stock moves slightly against you
That said, let’s take a look at an example using COP.
Since we feel the stock has some room to run before hitting potential resistance, and since COP just made an ascending triangle on the charts, we would put on a bull put spread.
To do this, we would first want to sell a put option that aligns with possible support — so somewhere in the $64-$65 area, which marks the baseline of that triangle.
We could sell the weekly 1/24 65-strike put for the bid price of 68 cents.
Then, because we don’t want to face SERIOUS losses in the event of a pullback, we could buy “options insurance” by purchasing the weekly 1/24 63-strike put for the ask price of 31 cents.
Subtracting the 31 cents paid for the lower-strike put from the 68 cents received for the higher-strike put, our vertical spread would be established for a net credit of 37 cents.
That’s the MOST we could make on the trade, assuming COP stock stays above our sold put strike of $65 in the short term (or at least before expiration on Friday, Jan. 24).
Should the stock make a SERIOUS U-turn and move back below $63 — our bought put strike — within the options’ lifetime, the most we could lose is $1.63 (2-point difference between sold and bought strikes, minus 37-cent credit).
To me, that risk/reward ratio isn’t too enticing.
We could get more aggressive with our strikes, selling the at-the-money 66-strike put for $1.02, and buying the 64-strike put for 49 cents.
However, that would mean we’re trying to get 53 cents ($1.02 – $0.49) by risking $1.47 (2-point difference between strikes, minus 53 cents).
Not much better.
Typically with my credit spreads, I aim for a tighter risk/reward backdrop — like risking $1.30 to make $1.20.
Or, like with my recent Alibaba (BABA) trade, I risked $1.50 — or $15,000, since I trade 100 contracts at a time, and each option controls 100 shares — to make $1, or $10,000.
That trade worked out nicely, with paid Weekly Windfalls members watching me make a cool $5K in UNDER THREE SESSIONS!