Sunday, June 12, 2011

WTI Crude Oil Trading Ideas and Thoughts 9:00PM CST 6/12

(Chart 1 - WTI Crude Daily Zoom)
(Chart 2 - WTI Crude Daily)

Friday's session gave us the start to the selloff I was looking for here (all be it a day or 2 late but better late than never)

We stalled right at the bottom of the current bullish channel (light blue on these charts)
The bottom of this channel, is also the neckline for the current head and shoulders developing in crude.

Here are my thoughts:
Since the May 5th crude collapse, We have been in a range of 105-95.
We have made 3 lower highs since of roughly 104.5,103.5, and 102.5.
Every time we got down to 95 it had shown tremendous buying strength.
My gut feeling is if we get down there again this week or next, the sellers will overwhelm the buyers.

Now for trading ideas:
1. First of all let me start this by saying I ABSOLUTELY HATE CNBC. They are nothing but a bunch of cheer leading shills who lose what little credibility they have day by day. However, from time to time their guests drop nuggets for those paying attention. One such nugget was dropped Friday afternoon, when a guest proposed buying a strangle on oil. (a strangle is an options position where you buy an out of the money upside call and an out of the money downside put. You are making a bet it will break out of a range.)

Sandwich and I love this idea. We have been talking about it all weekend, and will certainly put this on when equities open this Monday, if crude is still at these levels. I like buying 106 calls and 94 puts (We will do this in USO most likely so do levels in that that correspond to these crude levels). I think crude is headed lower, but I could also see how it has lots of room to the upside if it decides to go. Long story short, it is in a pennant (see the burgundy trend lines hugging recent price candles). More often than not, things in pennants get squeezed to a point and then breakout hard one way or the other. We feel this strangle will profit from a breakout of this type.

2. Sell crude on a break of the neckline referenced earlier. Target just south of 96. Stop with a close over 101 or a hard stop of just over 102.