Oil... $120 is the make or break point. I expect a bounce ~ market folly

Thursday, June 5, 2008

Oil... $120 is the make or break point. I expect a bounce

Wanted to touch on oil here since its such a big part of the markets these days. Currently, its pulling back and expectedly so. It was due for a pullback, but now we are approaching a very important make or break point: $120. As you can see in the chart above, every dip in oil has been a buying opportunity. And, interestingly enough, each dip has dipped all the way to the most recent peak and then bounced off that peak. Because, after all, that peak used to be past resistance. But, once we blasted through it, it became future support. For some reason I can't get my graphics to show up on the chart but do me a favor and just mentally draw a line horizontally across the $120 mark. There you will see where the pullback is headed. And, if look at the peak in the end of April, where does it sit? Yep, right at $120. Here's the deal, I'm short-term bearish on oil simply because it needs to pullback even more. All you hear about now is consumers complaining about $4 gasoline. So, with demand in the US (one of the biggest consumers of crude) decreasing, oil needs to pullback in price. Pure supply and demand economics. But, here's the catch. You can't expect that to happen because markets can remain irrational longer than you can remain solvent. So, I am *fully* expecting a bounce at $120 if we even get that low. Traders, speculators, you name it, they will all be rushing into this name on a beautiful technical bounce off of past resistance/now future support, as well as the moving averages. I've drawn the exponential moving average in red and the simple moving average in blue, since I know various people use various averages. But, this shows that both are right around $120. It's an imperative level and just wanted to make sure everyone had seen it. Not to mention, stochastics are oversold at current levels, implying a bounce. I don't usually look at stochastics on commodities in general, I typically use them just for stocks. But, its worth mentioning as it also backs up the argument for a bounce at $120.

So, buy oil on the dip to $120 for a trade at the very least. Place your stops below that and call it good. If it breaks below your stop then it's time to get short because then oil is heading lower and will have made a technical breakdown. You can play oil with ticker USO which is the US Oil Trust (think GLD but for Oil). Or, you could play it through the deep sea drillers like RIG, DO, ATW, etc. I'd recommend USO simply because the chart is identical to $WTIC (crude), so you've got clear entry/exit points. Whereas on RIG etc you've got to monitor the price of oil yourself and then set conditional buy/sell orders on those stocks once oil hits a certain price, triggering your order to buy/sell RIG or whatever oil company you choose to play it with.

Also, just wanted to throw in some commentary from oil greats Richard Rainwater and T. Boone Pickens. If you're unfamiliar with Rainwater, he's down in Texas and was famous for striking it big on heavy bets on Disney as well as heavy bets on the appreciation of the price of oil. He and Boone share the Peak Oil Theory belief. At any rate, Rainwater says he's short-term bearish on oil, and he makes the right case in this Time article here.

Boone Pickens also spent some time talking to Time magazine about oil (and his odd position in Yahoo YHOO). You can check out that video here.


Anonymous said...

I'm glad I found this blog. Keep up with the good job.

market folly said...

thanks for the kind words, anon.

Anonymous said...

And bounce it did.

Great job on the blog, valuable info on how the fund mgrs are placing their bets.

Thanks for you work.

market folly said...

thanks for the comments, definitely appreciate it!