This is my first article for Oilprice.com, so I tried to find something really upbeat to write about. I wanted to be positive and to re-assure those of you here that oil, and energy in general, is in an almost perpetual boom and that everything in the garden is rosy. I tried, I really did, but my role here is to help you make money from the energy markets, not to make you feel all warm and fuzzy, and reality kept intruding.
There are, for me, a couple of bright spots; Cobalt International (CIE), for example, which I like for the admittedly unscientific reasons detailed in this Nasdaq.com article. The thing is, however, that as I’m sure most of you are aware, the fate of most things in the energy sector is tied to the price of crude oil, particularly in the short term, and even a cursory reading of that chart tells me that further gains are unlikely.
Actually when I say “even” a cursory reading of the chart, that is not strictly true. Given that I made a living for twenty years in foreign exchange dealing rooms around the world, many people are surprised to learn that my chart analysis rarely goes beyond the basic. Those people, you see, assume that forex and all commodity markets are immensely technical. Their problem is that they haven’t met many real live, paid traders. Traders in the pit, on the floor or at the trading desk all understand one thing; the more obvious the chart pattern, the more useful it is. Prices don’t move off of chart points because of some magic; they simply move because certain levels bring in buyers and sellers, and the more obvious the level, the more of those there are.
The fact, then, that NYMEX WTI crude prices are trading up around two year highs would make me extremely nervous if I were long, and seems to me like a cue for a relatively low risk short. It’s not that they can’t go higher, of course they can. All you would have to do is extend this chart back for another couple of months you would see a high around 110, but any upside move is likely to be limited, while any drop has room to go. This, you see, is the key to trading, whether it be for the seconds or minutes that I and my erstwhile colleagues would hold positions, or for the years that investors consider. It always pays to look for the path of least resistance, and right now in oil that would seem to be downwards.
The upside to crude prices is also naturally capped by more general, big picture…