Story Highlights

The rally for oil-refining stocks is almost over.

And the coming downturn gives us the chance to make 150% by mid-December.

You see, news sent shares of U.S. refining stocks such as Phillips 66 and Valero Energy Corp. screaming higher in September and October.

But the stocks of companies that turn crude oil into petroleum, diesel, gasoline and more are set for a decline soon.

Starting on January 1, 2020, there will be a change in global marine fuel regulations. A report — known in the industry as IMO 2020 — will increase demand for cleaner fuels and boost business for refiners.

Sanctions on Iran and tariffs on Chinese goods spiked the cost to ship crude oil in parts of the world.

Most of that pain falls on refiners in China and other countries in Asia. Western refiners, however, are getting more oil and paying less to process it.

If you’re invested in refining stocks, I suggest you protect your portfolio from declines. But if you’re up for some short-term gains, I have a play for you.

Take a look at this week’s chart. The zigzag pattern you see — labeled ABC — is what we’ll focus on. More on that in a bit.

RBOB gasoline vs. Brent Oil - Johns Chart of the Week

Price action reveals that behavior. My call for a decline has little to do with forecasting industry fundamentals. I pay attention to how investors behave.

In this case, the price action that will weigh on refining stocks shows up in the measure of refiners’ profits.

We can play the decline of oil-refining stocks for a triple-digit gain in less than 10 weeks.

What This Chart Means for Oil Stock Share Prices

You can see the difference between two energy market prices in the chart above. (SIX:RBOB) is a blend of unleaded gasoline. Brent crude oil is a benchmark for global crude oil prices.

The chart reveals information about refiners’ costs and revenue potential.

The difference between costs and revenue potential is the refiners’ profit.

The more an oil-refining company can charge for RBOB gasoline, and the lower the cost of the crude oil, the higher its profits are.

When the refiners’ profits are rising, the price of RBOB gasoline is going up relative to the price of Brent crude oil.

That means refiners should be able to grow their profits because revenue is rising compared to the cost of crude oil.

Now, it’s important to understand how investors affect refiners’ profits. Watch my video below for the full story.

 

The last six weeks have been good for refiners on that count.

But the Apex Movement Patterns (AMPs) I use to analyze prices suggest the next few weeks will push those stocks lower.

The three-move pattern — remember the A-B-C labels on the chart above — took refining stocks higher.

That’s a result of trader behavior. Emotions cycle from positive to negative to positive in uptrends … and vice versa in downtrends.

The chart suggests the zigzag pattern will take refining stocks lower. And playing that move can take your trading profits higher!

As I said, it’ll soon be time to bet against refining stocks.

If you own refining stocks, consider selling them at the first sign of weakness. Or at least ensure you have an exit strategy in place if you plan to ride out the short-term downturn.

But if you’re an options trader like me, this is a great short opportunity.

Good investing,

John Ross

Editor, Apex Profit Alert

P.S. My colleague Matt Badiali and I developed a strategy to trade options and profit when stocks rise … or when they fall: the Apex Profit Alert System.

Right now, Matt and I have our eyes on a specific oil-refining company. Our AMPs predict the stock will fall about 14% in the coming weeks.

When our system generates a “buy on red” signal, our readers will have the chance to turn that 14% move into a 150% gain come December.

Just a couple of weeks ago, our system triggered a new trade on refiner Valero Energy. As I write this, our readers who made the trade are holding an open gain of 119% … after only eight trading days.