Wednesday  August 27, 2008

My apologies for last week as I was not able to put my newsletter together in time.

Well, it appears that the markets are trading sideways, which is beyond my abilities to comprehend. This is due in large part to conflicting supply and demand factors producing conflicting broad market fundamentals.

Here we are in front of the Labor Day Holiday weekend, which tends to mark the end of the Summer Driving Season and thus decreasing demand in the near term. However, Hurricane Season is only halfway through what has proven to be a more active year than the last two, which could lead to supply disruptions and higher prices. As I write this report, the remnants of Hurricane Fay are wreaking havoc on the South Eastern United States without having caused any supply disruptions to the Gulf of Mexico's Oil and Natural Gas fields.

Now, all eyes are on Tropical Storm Gustav. The operators of Oil and Natural Gas platforms have begun to evacuate non-essential personnel from their rigs. It is possible that as Gustav tracks into deeper and warmer waters that it will strengthen into a Hurricane, possibly one of major proportions according to the Weather Channel. From there it could make landfall anywhere from the Florida panhandle all the way west to the Texas coast. I have no idea where, when, and how bad this could be.

If Gustav heads toward Florida, we will probably not see much in the way of supply disruptions. If Gustav goes anywhere between New Orleans and Galveston I would expect to see significant production shut-ins from off-shore operations, the duration of which will depend on the storm's severity and sustained damage, of course. The magic bullet however comes from where Gustav makes landfall. If Gustav misses some of the major refineries or port/harbor operations the overall impact could be minimal. If Gustav makes landfall and damages some of these refineries, or port/harbors, we could see the beginning of a major bull rally in the energies. And just to make this more fun, all of this should be happening after the US markets close on Friday for a nice long 3-Day Holiday Weekend.

The conflicting broader market fundamentals are even trickier. The US Dollar and the energies appear to have broken from each other, now trading independent of each other. Some days we even see the stock market gain a hundred points as Crude Oil trades higher. Energy Inventories are bouncing between builds and draws and the markets' reaction has been opposite of what I expected. I would even go as far as to say that the Precious Metals are stuck in their own purgatory, almost as if they are waiting for Crude Oil to make it's next move.

Hopefully after the Holiday weekend we might see a return to the more normal high volatility trading we have become accustom to...

EIA Inventories

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.

Last week I recommended a Bull Call Spread of $122.50/$125.00 for November. The value for this spread when I first recommended it was $940.00, it dropped down to $840 two weeks ago and has now traded back to $920 as of this week. This spread is positioned to respond favorably if Gustav causes any type of rally in the Crude Oil market. Keep in mind that I was not anticipating a Hurricane for this spread to work, I was looking for a breakdown in the US Dollar Index but I will happily take what is given to me. As I write this, I think this spread can still be purchased at a reasonable price until Gustav makes his way further into the Gulf of Mexico. Call me directly if you have any questions, 800-284-1065.

Crude Oil

This is what indecisiveness looks like. As Crude Oil was not able to get sustained movement below the $115 price level it appears to have reset itself by trading back to the 18 Day Moving Average of Closes (in Red), but seems to be stuck trading both above and below it. Stochastics have come out of being embedded and are now neutral . From what I see here, I would look for Crude oil to trade above and then close above the $122.04 price level before I would confidently say it has turned around. I caution this by also saying the 45 Day Moving Average of Closes (in Blue) could begin to provide resistance to a break out above the $122.04 price level at about $127.66.  

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/

To view Ira's Weekly Gold Report, click here: http://www.iepstein.com/gold/gold.htm

And to view Ira's Mid-Day Video Updates, click here: http://www.iepstein.com/videos_start.aspx

Learn to trade the Futures Market like a Pro with Ira Epstein's cutting edge course, The

Futures Academy, contact Max Epstein at 800-446-9999, or email maxe@iepstein.com

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. You should be ready to "Short" the market before the close of that day's day session to offset any Long positions that could 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. What no one knows is whether or not there will be an assignment.

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.