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  • Proprietary Trading Of Oil Slumps But Could Be A Long-Term Buy

    Proprietary trading volume on oil has been hammered over the past two weeks, pushing the United States Oil Fund (NYSEARCA:USO) to support level near the 200-day moving average. Prices of WTI crude oil have tumbled 7% and pushed through $100 dollars a barrel on Tuesday for the first time since May. Although demand is retracting, and supply ample, crude prices are now oversold and could be poised to rebound.

    Supply from Iraq has been plentiful, but escalating tension has led the Department of Energy to reduce its long-term supply forecast. The escalation of violence in northern Iraq that started in June has introduced significant uncertainty into the Iraq oil production outlook. In the July Short-Term Energy Outlook, EIA forecasts Iraqi crude production to average near 3.1 million barrels per day throughout the forecast period, which runs through 2015. Compared to the June's forecast, EIA has reduced Iraqi production growth in both 2014 and 2015 to take into account recent events, lowering total production by 0.6 million barrels per day by December 2015. In the updated forecast, monthly Iraqi crude production is not expected to exceed its recent level of 3.3 million barrel per day estimate through the end of 2015.

    (click to enlarge)

    The reduction in Iraqi crude (which is now the second largest producer behind Saudi Arabia), could generate prop trading volatility and any additional supply disruptions could push crude oil right back up to the $107 per barrel level.

    The USO has tumbled from $39.5 and is trading slightly above support near the 200-day moving average at $36.09. Resistance on the USO is seen near the 50-day moving average near $38. The RSI (relative strength index) which is a momentum oscillator that measures overbought and oversold levels, is printing a reading of 29.9, below the oversold trigger level of 30 and could foreshadow a correction in price action.

    Jul 16 11:15 AM | Link | Comment!
  • Energy Stocks Should Continue To Outperform

    Despite the decline in the broader equity markets, energy shares have held up well and are poised to move higher in the weeks to come. Earnings season began on Tuesday, and now investors will concentrate on actual returns and guidance from companies for the balance of 2014. The XLE Energy Select Sector SPDR has climbed 15% year to date, but when evaluating its relative performance to the broader market, the XLE is still undervalued.

    Over the past 5-year the XLE has traded in a range between 0.61 and 0.47 relative to the broader market reflected by the SPY (S&P 500 index ETF). The mid-point of the ratio (which is calculated by dividing the price of the XLE by the price of the SPY) is 0.54. This would mean that the XLE could climb an additional 6% relative to the SPY to reach the mid-point over the course of the past 5-years.

    The RSI (relative strength index) of the ratio between the XLE and SPY is printing a reading of 52, well off the highs seen earlier this year near 72, and currently reflecting a neutral reading. Support on the ratio between the two ETFs is seen near the 50-day moving average at 0.50.

    (click to enlarge)

    The XLE has also been hindered recently by the decline in oil prices, which have slipped from their recent highs above $107.50 on a WTI basis to below $103 per barrel. The decline in prices comes despite continued geopolitical unrest, but the recent decline in demand has also played a roll.

    Solid reports on U.S. economic activity should continue to buoy oil prices, and although WTI could slip to $100 per barrel, there is still upside to energy stocks at these levels.

    Inventories remain robust except in distillates. U.S. commercial crude oil inventories excluding those in the Strategic Petroleum Reserve decreased by 2.4 million barrels from the previous week. At 382.6 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Gasoline inventories increased by 0.6 million barrels last week, and are in the middle of the average range. Distillate fuel inventories increased by 0.2 million barrels last week but are near the lower limit of the average range for this time of year.

    Jul 11 10:01 AM | Link | Comment!
  • Yahoo Jumps Higher; It's All About Alibaba

    Shares of Yahoo Inc. (NASDAQ:YHOO) climbed nearly 3%, touching a high of $35.26, before closing a notch lower at $35.13, following an upgrade from neutral to overweight by the investment and asset management firm Piper Jaffray. In addition, Piper Jaffray analyst Gene Munster increased the price target on the stock to $43.00.

    Many analyst believe that Yahoo's equity stake in Chinese e-commerce giant, Alibaba Group Holding is underestimated at the current price. Munster believes that as the time for Alibaba's initial public offering comes closer, it will send Yahoo!'s shares 20% percent higher than the current levels.

    Gene Munster compared Alibaba to other e-commerce companies such as (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and China-based Internet businesses such as Baidu (NASDAQ:BIDU) and Qihoo 360 (NYSE:QIHU) and estimated that Alibaba is worth $221 billion including cash.

    In May, the Chinese e-commerce giant filed for an IPO with the U.S. Securities and Exchange Commission, which is expected to be the next major Internet IPO in the U.S. market. Alibaba's IPO filing showed that Yahoo holds a 22.6% stake in Alibaba and that it is expected to offload 40% of its holdings in the upcoming IPO.

    (click to enlarge)

    YHOO is approaching resistance near the 200-day moving average at 36.01. A break of this level would push the stock to test the April, May and June highs at 37. A breach of this level would lead to a test of $40.

    Momentum on the stock is price is gaining traction as the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The relative strength index (RSI) moved higher with price action reflecting accelerating positive momentum while printing near 54, which is in the middle of the neutral range.

    Jul 02 10:21 AM | Link | Comment!
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