This chart shows that oil could be headed to $80, and here’s how to trade it

Investing


Crude oil prices are under pressure, but Todd Gordon of TradingAnalysis.com says the charts are pointing to a massive rally for the commodity.

Gordon is standing by his call that the market is starting to see signs of inflation. He also said the Federal Reserve won’t significantly tighten monetary policy. A Fed tightening, in this case raising interest rates, would boost the dollar, which tends to trade inversely with oil.

Central bank policymakers meet Dec. 18-19, and analysts are nearly unanimous that the to Fed will nudge up interest rates, according to a CME Group survey.

“The Fed’s not going to raise rates significantly over the next year,” Gordon told CNBC in a telephone interview Wednesday.

The central bank is “not going to provide the boost that the dollar would need to continue to rally,” he said on CNBC’s “Trading Nation” on Tuesday. “So if the dollar continues to stay quiet to slightly weak, crude oil should continue to move on up.”

But even from a technical standpoint, Gordon says a very promising inverse head and shoulders pattern has formed in the chart of crude, which he takes to be a bullish sign signaling a rally.

“Now we’ve come back and we’ve begun to break what we call the shoulder line, and we should begin to moving up, potentially reaching the $80 level,” he said. “So what I’d like to do is just be long crude oil.”

In other words, Gordon sees crude surging 38 percent from Tuesday’s levels.

To play for a huge surge in crude, Gordon wants to trade the oil-tracking ETF USO. He is buying the March 16 weekly 11-strike call for about $1, meaning that he sees USO staying above the $11 level. This means that Gordon is risking $100 on the trade, and will make money so long as USO closes above $12 on March 16.

But in case USO starts dipping below $11, Gordon wants to establish a place to stop out of the trade.

“If the $1 premium we just outlaid gets cut in half down to about 50 cents, the trade isn’t working,” he said.

Crude oil is up almost 8 percent year to date.



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