Oil has continued its recovery, climbing off its perennial deathbed to waltz again among buyers. I've always been partial to the MLP side of the equation rather than the commodity itself, so as I was looking at the potential of oil setting up for a summer breakout, I naturally ended up looking at the setup in the Alerian MLP ETF (AMLP). While you'll see several ETNs in the sector, I prefer to roll with an ETF since it holds the underlying security and I'm not as worried about an issuer no longer creating notes or halting the offering. And while oil looks intriguing, I don't know that it translates to a buy on AMLP right here.
Looking at the daily setup, we have a rising wedge pattern, and while this can trigger a buy on a breakout above the upside resistance, $12.50 in this case, it tends to fail more often and break lower. The wedge is so tight that we only see 2% between breakout and breakdown. I do still like the idea of a long AMLP play, but I expect we'll see a period of consolidation. I've highlighted the price action in green boxes when we see a rollover in the Full Stochastics. In February, there came a nasty drop in price along with the rollover, but for the most part it has been a five- to seven-day pullback followed by a move higher. The February time frame held the distinction of a very weak StochRSI and MACD, currently not present nor present in the last three pullbacks with a similar setup as today. A pullback to $11.75 would be ideal, but I don't want to see anything violate $11.25 to the downside as that would put $10.25 into play.
As far as its relationship to oil represented by the U.S. Oil ETF (USO), AMLP shows a strong but not perfect relationship. If we look at the 20-day correlation measurement near the bottom of the chart below, we'll see it is often strong, running 0.75 or greater, but there are clearly periods of divergence. Scanning a little lower, the correlation between AMLP and natural gas appears random, leading me to conclude the focus here should be on oil. Simply comparing the price action of AMLP (green/red line) with USO (light green area), the symmetry is very clear to see. While they don't move together perfectly, which we already knew by the correlation measurement, we can see a clear relationship.
In the end, one can consider AMLP and its 7%-8% distribution as a proxy for a bullish oil sentiment. While one could look to pull a pair trade from this, for this analysis, I'm staying with the basics and I'll be looking for AMLP as an add on a pullback to $11.75 or breakout over $12.50.