June 18, 2008

I am NOT calling for a top in the Energy Markets. However.......

As mentioned last week, I am always reluctant to come out and say that any market has topped out. However, the Crude Oil market is starting to look suspicious to me.

As we all know Crude Oil has been consistently making new all time highs. But a closer look at the market makes it clear to me that Crude Oil needs something, anything, to push it over the $140.00 price level.

First, price action on the US Dollar is becoming inconsistent with Crude Oil's erratic price action. While I still believe Crude Oil is sensitive to a weakening greenback, I don't see them moving in lock-step with each other. A strong break in the US Dollar, below 71, could be the catalyst to send Crude running for $150. But if the Fed doesn't make any adjustments at the next FOMC meeting, the US Dollar could trade simply end up trading in a sideways pattern, not to be mistaken with the US Dollar "Strengthening". Ultimately, I think the Fed is going to keep some "Powder in the Keg" for Lehman Brothers, should they go belly up.

Second, without a major natural disaster, I think the Crude Oil is going to have trouble closing above $140.00. No, I am not hoping for any Hurricanes this year even though we were very fortunate not to have any during the last two years. As of now I think the market has priced in all of the major production shut-downs, shut-ins and supply disruptions. That doesn't mean that nothing else of significance can't happen. It can. A single Category-I Hurricane making it's way into the Gulf of Mexico would put the fear of God into these markets.

Third, military action or in-action. The worst thing that could possibly happen to anyone that is long the energy markets would be world peace. Israel has just agreed to a cease-fire with Hamas militants in Gaza and is now looking to begin peace talks with Lebanon.

Before we get too far ahead of ourselves, I am not looking for $65 Crude Oil in the next year. What I want to stress is that I think the Crude Oil market has made its move on all available known factors and that from here it might take additional bad news to get higher. I would not be surprised to see Crude Oil trading below $120 unless one of the two scenarios I mentioned comes to fruition. And by the way, our good friends the Saudis will be hosting a meeting this weekend aimed at "stabilizing" prices...

Trade Recommendations

Three weeks ago I recommended an August Crude Oil 136-138.50 call spread and a July RBOB 342-348 call spread. Today the August Crude Oil market settled at $137.17 and July RBOB settled at $3.4667. There are no new recommendations for now, just take these position off if you own them.

Crude Oil 136-138.50 Bull Call Spread.

I believe now is the time to get out of this trade. The underlying futures contract settled out at $137.17 today, which means the spread is intrinsic by $1.17. If August Crude Oil trades higher on Thursday, I recommend taking the trade down and booking any profits you get, even if you only break even. I DO NOT recommend holding this trade through the weekend because of any possible intervention by the Saudis.

RBOB

342-348 Bull Call Spread.

This spread expires next Wednesday, June 25^th. If you followed my recommendation, you are currently profitable on this spread and I also recommend taking this one off ASAP. The two biggest reasons why you should are #1, possible Saudi market intervention and #2, options expiration is also at the time of the next EIA Inventory report. Take your money...

Crude Oil

I see very strong resistance at the $138.00 price level. As I have mentioned, I think it will now take some more bad news to get a clear break through above this level. Also, notice how the market appears to be floating above support at the 18 Day Moving Average (in Red). With the bullish inventory report from today, I think we could see higher prices on Thursday.

Notice how the $3.40 price level, which formerly was a resistance level, is now acting as a support level. And in conjunction with the 18 Day Moving Average (in Red) no less. Again, the EIA inventory report was very bullish for Gasoline. I expect it to test the Bollinger Band (in White) at 3.55 before the end of the week.

Please call me to discuss any questions you may have, 1-800-284-1065 or markp@iepstein.com.

Good Luck and Good Trading,

The Seasonal Chart was provided by Moore Research Center http://www.mrci.com/

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If the spread is held through expiration with the price of the underlying futures at or above the top strike price of the spread at the time of expiration, then the theoretical market value of this spread will be realized. On the date of expiration the option contracts will convert to futures contracts with an additional round turn commission incurred as a result. This spread does not have to be held until its expiration. Profits can be pulled or losses can be cut at any time during the life of this spread.

If the spread is held through expiration with the price of the underlying futures contract settlement above the lower strike price but under the higher strike price, the option with the lower strike price will convert to a Long Futures Contract and the option with the higher strike price will expire worthless. Your broker should be ready to "Short" the market before the close of the day session to offset any Long positions that will be assigned. By not closing out any Long positions, you are assuming the risk of being Long a futures contract. For that reason, I highly recommend working with a Broker to manage any option spread trades.

If the spread is held through expiration with the price of the underlying futures contract settlement is below the lower strike price, the value of the option spread will be Zero ($0.00), the price you paid for the option spread and all associated fees will lost.