wicked oil

Jul 5th, 2008 | By | Category: Gilbert Mendez's (Gman's) Blogs
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I am spending my fourth of july weekend in Boston visiting my college roommate.
While at a BBQ last night I got a chance to speak with a few wicked smart MIT kids. Not surprinsingly these kids have an IQ comparable to the price of oil but when it comes to the stock market most make the same mistakes as the average investor.

This brings me to the point of this entry. As of late Oil has been getting a lot of media attention. The perception is that oil will go through $150 and will hit $200 pretty soon. Normally as traders we find that the easier money is found by following the trend. However, we are starting to see plenty of signs that are screaming for a correction before and if we go higher:

1. Oil has had a nice 90 point up move in its last leg with no major pullbacks
2. Volatility has increased dramatically at these levels
3. There is a divergence between the price of crude oil making new highs and the oil stocks not following through
4. The general public talking about buying oil stocks at these levels because they are going higher
5. The up moves are getting shallower and shallower on the new breakouts
6. The oil sector sold off on heavy volume last week

With this said it seems to me that the path of least resistance is for a correction in the price of oil. The risk versus reward of a long at these levels is definitely not favorable. This doesn’t mean to go out on monday and short oil futures or your favorite oil stock. We need confirmation from the box and much more importantly we need a catalyst. So here is what i will be looking for as a catalyst:

1. a blow off top: a sharp up move (6-7 point) in one session on heavy volume
2. a struggle for oil to get through $150
3. Oil stocks showing a poor bounce from the sell off last week (pattern seen in the gold stocks a couple months ago)
4. a sharp move through the important $150 psychological level with very little to no support on its retest.
5. a large exhaustion gap through the $150 level

Let’s wait and see what happens next week. In the meantime I’m gonna go enjoy the rest of my weekend here in Boston. Cheers!

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