Fed signals rate hikes while Iran floods the market with oil — short the energy
Thesis
The threat of higher interest rates makes the U.S. dollar stronger, and since oil is priced in dollars, a stronger dollar makes oil more expensive for global buyers, naturally pushing the price down. On top of that, the new Iran deal relieves geopolitical tension and opens up a major shipping route, meaning more oil supply will hit the market just as global demand might shrink from higher interest rates. When supply goes up and demand is pressured, oil prices usually fall. Betting against oil, or oil drilling companies, captures this double whammy of bad news for the energy sector.
Strategy approach
Build a trend-following short strategy on USO (United States Oil Fund) using the daily timeframe. Enter short when USO closes below its 20-day simple moving average and the 10-day moving average crosses below the 20-day moving average. Exit the trade if USO closes back above the 20-day moving average. Use a 5% stop loss to protect against a sudden reversal in oil prices.