Saturday, June 11, 2011

Weak oil stocks...

The broad stock market looks weak due to slowing in the economy. While I have a long term bullish view of oil and oil prices I can't help but notice a possible bearish trade in the oil services ETF: DIG. Notice the topping pattern, a double head and shoulders. A break below the neckline could signal a change in trend.

And the inverse ETF is: DUG. Shown below. It does not exactly track the inverse but is good enough for a trade from the buy side.
There may be some buying triggered above the neckline shown by the bold black line. The reason there may be some serious buying is due to what I perceive as the continued bullish bias in the trading/investing community regarding oil. I myself still am bullish on oil prices, but that may be the best reason to consider a bearish bet. I have found the best trades to be when others are wrong in a big way. I will still limit my risk by scaling into this trade. If it happens. Perhaps looking for a three to four week decline in DIG.

On the fundamental side, the recent squabble in OPEC over raising output. The Saudis wanted to raise output, but they couldn't get the organization to agree. So the Saudis say they will raise their output. If they happen to be wrong about world demand they may just push oil lower than they intend. That would be the trade.
It is strange for OPEC to be disagreeing about raising output. For many years many of them cheated by producing more than they were supposed to. And they lied about their reserves in order to produce more. Now they want to hold it back. I am fairly sure they know they are going to run out of spare capacity, and see no sense in letting go of it cheaply.

The DUG trade was a fail. Out with a small loss several days ago...

In fact oil is showing strength, as is the general market.

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