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A Conservative Bet On Oil By Buying Russia

05/16/08 11:41:20 AM
by Mike Carr, CMT

While OPEC economies are almost entirely dependent upon oil, Russia offers a way to profit from high oil prices with a margin of safety offered by a more diversified economy.

Security:   RSX
Position:   Buy

Market Vectors Russia ETF (RSX) recently broke out to the upside on a point & figure chart of relative strength (Figure 1). While this is a good signal, it should serve as a starting point for research by the technical trader looking for confirmation of a trade. Relative strength measures comparative performance. In a bear market, high relative strength may indicate that the stock is simply losing less than the overall market. That is the case with Russia. The MSCI Russia Index is down 1.4% year-to-date, compared with a 5% decline in the benchmark MSCI Emerging Markets Index.

FIGURE 1: RSX, P&F. Relative strength, charted in a point & figure format, just completed a triple-top buy signal in RSX.
Graphic provided by: Market Dynamics.
The pattern and the moving average convergence/divergence (MACD) also offer bullish support for RSX (Figure 2). The stock gapped out of an extended basing pattern and cleared prior resistance levels. The wide triangle formation offers an 12-point upside in the stock, and the gap provides a clearly defined stop less than three points below current prices. The reward-to-risk ratio is roughly 4-to-1.

FIGURE 2: RSX, DAILY. The bar chart of RSX shows prices at new highs.
Graphic provided by: Trade Navigator.
Fundamentals should be considered, or at least looked at, as part of the buying process, along with other technical indicators. Fundamentally, Russia was called an "exceptional value" by analysts at Goldman Sachs. The investment firm advised its clients to take advantage of what they called a "mispricing opportunity" in Russian equities. These analysts are looking for 20% gains over the next 12 months, with the catalysts for a rally likely to come from soaring oil prices as well as a decision to cut oil taxes.

With fundamentals confirming technicals, RSX represents a conservative investment in oil. As Figure 2 shows, Russia can be a volatile investment. But with the price of oil unlikely to dramatically break down, the volatility is likely to be on the upside.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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