High to low on the week Crude oil jumped $6/barrel but front month futures failed above $108 just as that level capped upside on 7/19 and again on 7/22. Crude oil fell short of its contract highs by 11 cents and has traded south since. Early support came from upbeat news out of China and Europe but that was quashed by a disappointing jobs number; about 20,000 less jobs than expectations and unemployment remaining at 7.6%. Strength in the US dollar or weaker equity markets could be outside contributor to further weakness in energies.
Under current trade the next support level comes in at the 8 day MA (orange line) and the 18 day MA (dark blue line). I suspect that futures are below those pivot points next week and on our way to last week’s lows. A 38.2% Fibonacci retracement and trade to the 50 day MA (green line) is ultimately where I think prices drift to in the coming weeks. If it is a slow grind lower it may be advisable to start with October futures as opposed to September if you do not want to worry about the roll. As of this post September carries a 64 cent premium to October.
As for trade ideas…
- Short futures with an options leg…either selling puts or buying calls 1:1. If implementing a call option leg I would be a buyer of September calls (only 14 days) or selling puts in October ($102 – $104 strikes) against a short futures. The idea is on a move lower in the futures to make more money in the futures than you would lose in your options leg.
- $5 Bear Put spread in either October or November potentially looking to unwind in the coming weeks or hold until expiration if intrinsic on both legs. Current costs in October for $105/100 is ballpark $1700 and in November for the same strikes but an additional months time $2200. The two legs allow some flexibility and by selling the lower leg and using a strategy like this it gets your target closer vs. paying the same premium for an outright. That is the pro the con is you cap out your profit potential at $5 or $5,000 per spread minus the premium paid and all transaction costs.
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