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May 29, 2008

Time to Short Oil?

Today was all about oil. With the energy complex selling off in the early-going, precious metals were getting nailed for another 2-3% while equites were edging higher. The crude oil inventory report then hit the wires with a huge draw down. Within 10 minutes, crude oil had rocketed $4 per barrel, equity rolled back to flat, and precious metals regained nearly half of their initial losses. In a final twist, as if the report were withdrawn and had never been published, oil started getting sold hard, ending the day six bucks below the reaction high. Equities partied on the news (with tech especially strong), and metals got clubbed like baby seals during culling season.

For those of you itching for a sign to short oil, a failed rally on a bullish report is as good as it gets. The danger here is that price is sitting on top of the previous mini-consolidation area (potential support) and your best stop price is 10 bucks away. But the view of the entire run from early 2007 suggests a pull-back is nigh:

oil chart

It would be perfectly natural for oil to backtrack to the midpoint consolidation zone ($85-100) from here. If you decide to try your hand at a short, keep in mind that the ride back to the consolidation area, should it occur, will be quite volatile. Droves of traders are keen to short this thing, which only means the market gods will try even harder to shake their convictions.

The big question for metal heads is: if oil retreats sharply, what becomes of the metals? They dropped while oil was rising. Can they buck the pressure of an oil sell-off and rise, or at least stop falling? The 8% drubbing they've suffered this week is tough to swallow when they appeared ready to break higher again. Perhaps shorting oil is a more attractive prospect for those who are already long metals. If oil falls and takes metals with it, at least you are hedged. If oil shoots back up, metals are likely to recover, as well. But if metals buck the pressure of falling oil, you could win on both sides of the bet.

For their part, the miners just can't seem to win of late. If gold price is rising, energy costs are crimping profits. If energy prices fall, then gold seems to fall with them. There will be a sweet spot for these guys when gold will rise without energy shooting through the roof. Hopefully, the charts will clue us to when this will begin.

stock chart

Despite today's 3.6% hit (make that around 10% for the last week), the GDX chart has not been severely damaged. As you can see, we have so far just back-tested a breakout.

And finally a quick note on equities. The SPX hit the 1407 pivot point mentioned in yesterday's post and then promptly retreated. If a larger correction is to occur here, this level should continue to hold. So, given all the interesting points we are seeing in commodities and stocks, the next couple of days should tell us a lot about the near-term directions of prices.


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