October Crude oil recently traded above $112/barrel but as of this post futures are trading $5 under that level below its 8 day MA (orange line). I often use the 8 day MA and 18 day MA as key pivot points when navigating the energy sector and as one can see on the chart below these levels have served as magnets in recent weeks. While I cannot rule out an over reaction that could spike oil prices short term I do feel that the path of least resistance in the coming weeks is lower. While it may be counter intuitive to be selling energies with turmoil in the Middle East this is a classic case of buying the rumor and selling the fact. Once missiles start flying in Syria which I do believe is only days away I expect energy prices to move south. My first objective is the 50 day MA (green line) which would confirm an interim top was in place. Below that level my suggestion is to use the Fibonacci levels to help time your exits.
A lack of upside follow through after yesterdays reversal does not bode well for the bulls today. Could a bearish inventory report be a nail in the coffin and get bears back in the driver’s seat? There appears to be growing support for limited action in Syria but an exact game-plan have been slow to develop. With no boots on the ground and a measured attack I do not see this as an extremely bullish development for the energy sector.While past performance is not indicative of future results take a trip down memory lane and see how Crude oil prices reacted in previous Middle East conflicts. A spike leading up to the clash and then a volatile correction..time and time again.
Now for the trade…
As opposed to throwing caution to the wind and blindly getting short WTI futures consider:
- Short WTI futures against a purchase of October calls 1:1. 14 days until expiration. You could stop the bleeding at $110 purchasing that strike for $1300. On a move lower one would need to overcome the premium paid, in this instance $1.30 plus fees.
- For every (2) short WTI future purchase 1 Brent futures. I like this spread which has come in from even money about a month ago, currently trading at $7.25 in the October spread.
- Buy Bear put spreads in November. Futures currently trading at $106.90/barrel. One could buy a $105/100 for $1600. 44 days until expiration, a positive delta of 18% though I think held until expiration we could be intrinsic on both legs with futures under $100.
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