In the last 10 weeks Crude oil has added $12/barrel lifting prices as of this post to four month highs with August futures flirting with the $100/barrel level. Not that the fundamentals have mattered in the energy complex but Crude oil inventories are at the highest levels they’ve been in years.
For the last 10 months with the exception of a few sessions August Crude oil futures have been contained in an $11 trading range, identified by the horizontal green lines in the chart below. Current trade has futures about $1 below that pivot point and $2 below the psychological $100/barrel mark. Stochastics are showing overbought levels and prices are the furthest they have been above their 100 day MA (light blue line) since reaching an interim top in the first week of April…followed by a collapse of $10/barrel in the span of 3 weeks. Past performance is not indicative of future results.
$100 Barrel…not this time!
The outside market influence is somewhat supportive with equities advancing off their 50 day MAs last week. The problem I have with this is I suspect stocks are running on fumes. Additionally if we get a dead cat bounce in the US dollar Crude should exhibit an inverse correlation. It is a hurry up and wait situation as ample apprehension exists with market participants waiting for an FOMC decision tomorrow…the Fed will provide more clarity on the path of QE moving forward. To Taper or not to taper? The fact that a fear premium over Syria has been priced in and further conflict does not look imminent one would expect that premium...say $3-4 to be stripped out of the price in the coming weeks.
As for the trade…My suggestion is short futures in either August or September contracts while simultaneously selling out of the money puts 1:1. A 50% Fibonacci retracement puts August futures $5.75 lower. Confirmation of an interim top would be delivered in my eyes on a settlement under the 8 day MA (orange line) currently just under $97/barrel. I think a reasonable first objective is the 50 day MA (green line) which also is the same level as the 38.2% Fibonacci level.
By. Matthew Bradbard