Oil Running into Euphoria

May 21, 2008

A combination of spiking oil, and a dismal Fed report sent us spiraling downward. The good news is that in a course of a week, we are as oversold (using a fast stochastics for measurement) as we were back in March when we were hit with the Bear Stearns collapse. What does this mean? We should be due for a bounce tomorrow or Friday. However, the markets need to get turned around here in a hurry, as we are on the verge of creating some serious technical damage to the charts – in particular to the upward trend that we have been on for over the past two months. Another day like today, or even half of what we saw today, could be enough to bring back the aggressive short-sellers looking to bring the markets back down to the bottom established back in March. If this happens, we will take decisive action with various positions in our portfolio to lock in profits, and begin aggressively establishing short positions. But we’re not at that point. Instead, we would like to see the markets bounce from this point here, while the damage is minimal.

What the markets are facing right now is out-of-control oil prices that are being driven up by a perceived shortage in the not-so-distant future and plain and simple speculation. However, oil is starting to attract the attention of the crowd, and what we call ‘easy-money’ (or more bluntly put “dumb-money”) that is beginning to flow in and as a result we could start seeing some distribution in the oil markets. Another way to spot a top in a particular market is to look for media pundits making outlandish comments, just to add to the hysteria. For example, there was a goon on CNBC predicting gas prices to eventually hit $12-$15 dollars a gallon. This is just mere attempts to stir the pot. However, we aren’t saying that oil isn’t a problem, but we do believe that it is too much of a price advance at this point, and it will need to pull back some. As a country we need to look at building more refineries (since we haven’t done so in over 30 years) and consider drilling in remote locations such as the ANWR which is nothing more than frozen tundra in Alaska that can by itself make us easily energy independent for quite some time.

For those of you out there, that would like to cash in on the oil run believing that it goes higher from here, well, you have various options: one, would be to buy oil futures (CL) at a brokerage firm. Each contract controls 1,000 barrels of oil, which means each $0.01 advance results in $10.00 move, meaning that depending on whether you are long or short, there are a lot of inherent risks to this type of trading mechanism. Nonetheless, if you must, you can trade these using optionsXpress, ThinkorSwim, or ETrade. However if you are looking for a more less-risk alternative, consider (USO) – an ETF that follows the price of oil. The only capital that you can lose is the capital that you put in it (unlike the oil futures). And you don’t necessarily have to believe that oil is going up, to trade these oil vehicles, if you believe oil is primed for a pullback, then begin initiating short selling (check our glossary if you don’t know what this means)

Here’s the NASDAQ and S&P Charts…