Oil Looks Toppy - Time to Short?

Oil has reached lofty levels in recent past and most recognize that the reason is speculation. When snowballs begin to roll, they tend to get very big, very fast.

Bubbles have occurred many times in recent past, and most of us have witnessed the trends first hand. The oil bubble, however, has occurred and may correct much faster than the other bubbles we have witnessed.

Oil has moved up more than 30% in the past few months, much more aggressively than the market related bubbles we have seen. The old adage: what goes up must come down has proven to be correct in every other bubble that; the oil bubble is not likely to break that trend.

Timing is everything

The correction in oil could strike more swiftly than anyone is expecting.

From our strategic analysis the fair price of United States Oil (USO) at this time is approximately $71.54. From current levels a 30 point pullback is reasonable, and could happen in a violent retracement spanning just a few days. We have illustrated timing models to our clients s that they have the short signals, and reversal triggers in hand.

In addition, Oil Service Holders Trust (OIH) has recently tested longer term resistance according to the strategic analysis we have provided to our clients. USO and OIH are not directly related, but there are coordinative underlying trends between them and a review of both is prudent.

Recent trends have showed that the market and oil prices have been inversely related; review the chart below for details. The recent spike in oil prices, we all know, has hit the market violently and caused underlying concern for holders of Diamonds Trust (DIA) and S&P Depository Receipts (SPY).

Rightfully so, higher oil prices affect all of us, and at current levels the price of oil could hurt the economy and cause a greater recession. However, our analysis suggests that a correction in oil prices is imminent, and that's good for the market.

Soon, an excellent short opportunity will present itself in USO, and an excellent buying opportunity will present itself in DIA. This is not a hedge!

Comments

[ArtfulDodger:]

Excellent article. But you won't have many agreeing with you at this time. Practically everyone is an oil bull thanks to the media and the Big NY Houses.

I don't short, but I've sold all my oil & drilling stocks ahead of the soon coming blowout.

Keep up the good work.

Rebeldog

2008 May 28 08:33 AM

[ship shape ...:]

I would like too short the SA oil segment.

BTW, I would buy drillers and services ahead of the correction, since the market is going to put a lot of money to work in that sector, when the oil price correction occurs. May be we've seen the correction already, considering how nicely oil bounced of its support today.

2008 May 28 11:48 AM

[adamn111:]

I always thought oil was 'worth' whatever someone was willing to pay. Silly me. Did you say $71.42? How much are you selling at that price?

2008 May 28 12:41 PM

[Randy Kirk:]

Oil is highly priced because of the marginal utility of each extra unit of oil. "Why are diamonds, which are frivolous, expensive while water, while necessary for life, is inexpensive?" - Adam Smith asked this -- also known as the Paradox of Value. Economists more or less believe the solution to the Paradox of Value lies in the concept of marginal utility, as each additional unit of water was not valuable, because there was no shortage. If there is a shortage of oil currently, then it makes sense that oil is highly priced since it is significantly price inelastic.

2008 May 28 01:15 PM

[Tom Lutzenb...:]

Hey TK, nice to see you're doing well for yourself. We were college roomies back at SMC for a bit. And yes, I do agree with your post. The big question is really only when does the pop occur. But I do think longterm, unless supply issues are addressed that pop is only a dip and will return at much higher levels next summer.

2008 May 28 01:51 PM

[fxtrader07:]

Hi Thomas, I agree with your assessment overall, even while I have no clear cut target for USO: however, to those who think nobody will be selling uso at 71, i might ask a question: who had thought a year ago that someone would be willing to pay 105 for USO?
It's all about perception. I people get the feeling that oil was indeed in a bubble and is going to drop, a lot of hot money will run for the exits and price may overshoot to the downside (presenting a great buying opportunity, btw)

Now. what do you people think about a spread trade?
Short USO and long quality oil companies like COP or APc and perhaps some high-dividend oil trusts like PBT?
If USO stays flat, these companies shopuld be worth much more than today because the stock market still values them at a crude oil price of 90-100, rather than todays 130$(bl.
If USO falls, they will too, but will recover and stay flar/rise gradually as they keep making tons of money even with oil being 30 or 40$ lower than today.

2008 May 29 05:03 AM

[Thomas Kee:]

howdy fedj (sp) I hope all is well....yes...if we see this dip I expect an evetual reversal higher as well...

Tom.

2008 May 29 12:41 PM

[cynic69:]

Dear Tom - This is incredible nonsense. I think that the price of oil will come down because these hight prices are going to throw the world economy into recession. This energy induced recession may last a very long time.

2008 May 30 10:01 PM

[Thomas Kee:]

The recession is not energy induced...It is due to lower levels of personal liquidity levels as described by the Investment Rate. Review my website for details.

2008 Jun 01 03:11 PM

[5kDow:]

Looks like it was a good time to short oil, now it looks like its time to get back in

2008 Sep 22 11:59 AM