July 9, 2008

This is not a correction, so don't be fooled...

Yes, Crude Oil is down nicely from its all time high last week. Gasoline is also down, even though we are not seeing it at the gas pump yet. And to the casual observer it may appear as though the top is now in place. However, there are too many variables that leave this market vulnerable to a fast moving market.

I think Crude Oil needs to break through a technical support level at $132. Any price action between the high of $144 and this support level at $132 is not worth getting excited about. The reason I think $132 is important is because this is the price level that provided support to the Crude Oil market throughout the month of June. I want to see Crude Oil close below $132 to confirm the market has changed direction. As I have mentioned in previous reports, I think we are seeing expanded trading ranges due to higher prices. I think the price range between $144 and $132 is just that, a $12 trading range.

In my last report I also mentioned that I thought the Crude Oil market has traded too far away from it's moving averages and that we should be looking for them to "meet up" at some point. As of yesterday, the Crude Oil market traded to the 18 day moving average and even closed below it. This is certainly important because now the market has basically "reset" itself. From here it can bounce off of this level and make new highs or it can continue trading lower to the 45 day moving average. As of right now, I don't know what it will do.

Price action on the US Dollar is also setting Crude Oil up to potentially make new highs. From where we stand today, the European Central Bank raised interest rates in response to inflationary pressures they are experiencing. This has definitively given the ECB the advantage when it comes to the interest rate differential between the United States and the European Union. What we are witnessing right now is the result from a lot of talk from our leaders during the G8 summit in regards to the US Dollar. We have seen this happen before. As soon as the hype wears off, I expect to see the US Dollar make its way lower toward 0.70, and if and when that occurs Crude Oil could be reaching new record highs.

Trade Recommendations

I do not have a recommendation for this week. Even though I would like to see Crude Oil trade off of its most recent high, I don't see it as time to go long or short these markets.

To view the EIA's Weekly Petroleum Status report, click here: http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/txt/wpsr.txt.

Crude Oil

$138.00 price level that was formerly the resistance in Crude Oil remains one of this market's support levels. My upside target of $145 remains in place. Notice how the $132.00 support level corresponds with the 45 Day Moving Average (in Blue) at $133.66 and the Bolinger Band at $131.23. There is no sense in trying to be precise with numbers in this market!

As of now, I think that RBOB and Heating oil have topped out from a seasonal and technical standpoint. I caveat this by stating that new highs in Crude Oil will give us new highs in both RBOB and Heating Oil; seasonals and technicals aside. The quick and violent retracement I was looking for last week came when RBOB went from $3.59 to $3.33 this week. The market is currently trading at a technical support level of $3.35. This $3.35 level is the corresponding support level to Crude Oil's $132.00. Notice how the 45 Day Moving Average (in Blue) and the Bolinger Band converged at the $3.35 level yesterday.

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

Good Luck and Good Trading,

All charts provided on this report are courtesy of OST IraCharts. For a 30 day Free Trial of the OST IraChart software, contact me directly at 800-284-1065, or email me at markp@iepstein.com .

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

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The Bull Call Spread is the simultaneous purchase of a call option and sale of another call option with a higher strike price. This spread is used in anticipation of the market going up in price. In general, your risk of loss on a Bull Call Spread is limited to the price you pay for the spread.

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.