Crude oil is about to break out, and the oil services stocks may be the best way for investors to play the rally, according to Todd Gordon of TradingAnalysis.com.
While oil slipped on Thursday following another U.S. inventory buildup, Gordon believes President Donald Trump's tough stance on Iran could keep oil prices afloat.
Iran is one of the world's leading oil producers, and concerns around the key OPEC member abound as Iran has actually upped its crude oil production instead of keeping with the production cut agreement. But that could change if tensions between the U.S. and Iran rise.
Geopolitics aside, Gordon sees an oil rally ahead from a purely technical standpoint. Looking at the USO, the ETF that tracks the oil market, Gordon observed that it has had trouble breaking through $12. But with recent events, he said, the ETF could finally break through the $12 mark, which would correspond to crude rising to about $60 a barrel. The U.S. benchmark West Texas Intermediate crude was trading above $53 on Friday.
To play a rally in oil, Gordon recommends OIH, the ETF that tracks oil field services companies like Halliburton and Schlumberger. According to the trader, OIH's chart has formed a bullish pattern that signals a move up.
"The market has already broken the recent range [and] has settled in what we call kind of a bull flag, which is a short-term move against the established trend before we eventually resume [moving higher]," Gordon said Thursday on CNBC's "Trading Nation." "So I think we're going to move up toward that $37 mark once we break through that range." On Friday, OIH was above $33.
Gordon wants to buy the OIH March 34-strike calls and sell the March 37-strike calls for 63 cents per share. If OIH manages to rise 12 percent and close above $37 on March 17, Gordon would make $2.37 per share, almost five times his money. But with his trade, Gordon only needs OIH to rise 5 percent and close above $34.63 in order to turn a profit.
OIH is currently down 1 percent this year after ending 2016 strong, thanks to oil's surge following the November OPEC deal. Oil has swung between about $51 and $54 this year.