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Crude Oil Poised to Crash According to BAM Model

|Includes:ProShares UltraShort Oil & Gas ETF (DUG)

Back in the summer of 2008—when crude oil was moving into its 147 dollar high and many analysts were calling for 200 or even 300 dollar per barrel crude oil prices—the BAM Crude Oil model was calling an EPIC TOP and warning clients of “an immediate crash to the 87 dollar level into the Fall of 2008 followed by a continued plunge to the 36 dollar level over the coming 12-18 months.” 

At the time it was a very controversial call and I’ll never forget how hard clients were pounding on us to provide a “fundamental reason” for such a devastating decline.

Unfortunately, since we use a proprietary model, the “reason” we recommend buying or selling a market is strictly based on the model and NOT the apparent identifiable fundamentals, but in the case of crude oil we were willing to put forth a few ideas.   

  • Our view of the real estate market was extremely bearish based on the fact that it was the most highly leveraged market in the world both in terms of individuals’ loans as well as the derivatives tied to those loans. 
  • Our S&P 500 model was predicting an “unmitigated disaster” in which the SPX was forecasted to plunge all the way back down to 1998 price levels and, assuming that forecast was correct, we assumed the economies of the world would be in free-fall and up to their eyeballs in crude oil supply.
  • We were seeing something that appeared to be either outright manipulation or at least speculation on an unprecedented scale.  This assertion was based on the fact that our intraday crude oil model was displaying bizarre characteristics unrelated to the normal human emotion typically displayed in our work as well as the fact that our intraday model was more extended in our “topping count” than at any other point in history.    

Here They Go Again

Today we’re seeing the same type of puzzling action in our intraday crude oil model and, as a result, we’re doing exactly what we did during the summer of 2008—recommending an aggressive position in the DUG as a way to profit from the expected coming crash in crude oil. 

Not surprisingly, clients are again inquiring about a “fundamental reason” why crude oil would decline from current levels so, once again,  we’re going to state a few facts that might support the model’s prediction for a plunge in crude oil prices.

  • Our BAM “crash alert” is flashing a sell signal with a series of mini-crash windows the first of which is into September 2/3
  • We think the potential economic repercussions resulting from the spread of swine flu are being severely underestimated by the “don’t worry be happy” crowd
  • We’re seeing an extension in our intraday crude oil topping count that rivals the pre-wipeout extension of 2008
  • Our XOI model triggered a capitulation sell signal on 8-25-2009 and is calling for an immediate mini-crash leg or full-blown crash leg into September  
  • We believe a mechanical unwinding of the short Nat Gas/Long Crude Oil trade is at hand

In conclusion, we would suggest searching for your own compelling “fundamental reasons” that crude oil and crude oil stocks might be poised to tumble.  You know how we’re positioned. 


Stocks: DUG