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…
Crude oil futures chart for September 4, 2013
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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As always, I’m here to discuss specifics and give guidance. Shoot me an email…Give me a call… you can reach me at: mbradbard@rcmam.com or 954-929-9997
Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.
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