Crude oil has been extremely volatile in the last few weeks, with large swings both to the upside and the downside, but the movements possibly revealed where support and resistance lie.
PLAYING THE RANGE
The range it has traded in has held over the last few weeks. Crude oil has been a sell in the $96.50 to $97 areas, and a buy between $93 and $92. If we look at the trading behavior going back to March, it reveals to me that dips continue to be bought and I believe that upside potential to break out of the recent range could be on the horizon.
THE NEWS
First, there are rumblings on the geopolitical front. Syria is still out of control, Iran nuclear talks are going nowhere, and over the weekend, North Korea launched short-range missiles. I believe these factors could potentially influence crude oil markets.
THE FED
Second, and in my opinion, possibly the most important, is the Bernanke testimony Wednesday. It is my contention that the Chairman will leave the spigots on as it relates to quantitative easing at $85 billion a month. In my view, this could pressure the dollar, giving dollar based commodities like crude oil a potential boost.
Inflation pressures remain subdued in my opinion, leaving deflation as the number one enemy of the Fed. Recent improvements in monthly jobs data may give the Fed the reason to keep monetary policy at status quo, which I feel could provide a lift to energy prices.
BIG PICTURE
Let’s be clear. The fundamentals of the energy market regarding crude and gasoline this year have been bearish in my view, with ample supply to offset tepid demand.
However, this hasn’t translated in lower prices at the pump or in the futures market for that matter. The two dips below $90.00 a barrel we have seen the last three months didn’t last long and ended up being tremendous buying opportunities.
WHAT IT MEANS
That tells me that there is tremendous conviction to the upside and that triple digit crude prices could possibly be in our future once again. Markets that don’t trade bearishly to bearish news usually react in the opposite direction, in my opinion.
THE TRADE
I am looking at buying the August Crude 103 call and selling the August Crude 107 call for 45 cents, or in cash value a $450.00 purchase for the spread. The risk on the trade is the price paid for the spread plus all commissions and fees. The maximum you could collect on the trade is $4,000.00, if both strikes finish in the money at the time of expiration, minus the price paid and all commissions and fees. August option expiration is in mid-July, so there is time to work the trade.
Please e-mail me here for other trade ideas or to be added to my Daily Gold Report.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
