Charts of the Day

Buy at 10am sell at 12pm strategy, as I contemplated yesterday, could have netted $325 on 500 shares.

Today's breakout was precipitated by a surge in oil prices and speculation of HAL buying BHI.
If the rumor is true are more Oil Service acquisitions coming down the pike? Will oil stay stubbornly high and not follow seasonal patterns? This could put a bid under OIH and XLE.

Herky jerky movement in the morning, then afternoon upward trend developed with many head fakes to confuse you. In retrospect, this was a trade that I should have made based on the volume spike at 13:30.

SMH also made afternoon comeback along with QQQQ, but still divergent.

Oil Prices Could Go Either Way - $90 or $50?

That's what the WSJ is saying today in this article.

Here's some current thinking from the article:

Scenario #1 - Oil Goes UP (long OIH or long DIG)

Recent price gains are largely based on forecasts for a global oil-supply
deficit over the rest of the year and into 2008. If the shortfall -- which
analysts suggest could be more than one million barrels of crude oil a day --
materializes, it would provide considerable incentive for the large financial
investors who have played a strong role in the oil rally to stay in the market
and push prices even higher.

Scenario #2 - Oil goes DOWN (short OIH or long DUG)

If expectations for a warm Northern Hemisphere winter increase or there are
signs of a sharp slowdown in U.S. growth, analysts expect some of these
investors will run for the exits and push oil prices lower. That could mean
prices as low as $50 a barrel.

Keep your eyes on....

SUPPLY & DEMAND FORECASTS - "Because expectations of a supply deficit are influencing the direction of oil prices so heavily, any revisions to supply and demand forecasts will likely have a large impact on the outcome."

WEATHER - "The biggest possible reasons why demand may fall short of forecasts are that the subprime-mortgage crisis continues to ripple through the economy and the recent trend of warmer-than-normal winters continues...Seasonal forecasts from the the National Weather Service call for above-normal temperatures in the Northeast, the world's largest heating-oil market, from September to December and hint this could continue through March."

U.S. RECESSION - "Analysts also are mixed on the outlook for U.S. and global economic growth. UBS economists see a 40% chance of a U.S. recession as a result of credit concerns. If this occurs, the bank sees the slump spreading to other economies and pulling oil prices back near $50 a barrel."

What analysts are saying...

UBS - "A modest [economic] slowdown and relatively warm winter weather is our base case, in which prices moderate in the fourth quarter and the first quarter of 2008," noted Jan Stuart, energy economist at UBS in New York, in a recent report. UBS AG forecasts a 600,000-barrel supply deficit and that futures will average $69 a barrel in the fourth quarter.

GOLDMAN SACHS - Goldman Sachs, which is predicting $95 oil at the end of 2008, says the probability of a U.S. recession is "rather low" and that demand from less-developed countries will likely support oil prices if U.S. demand moderates. Goldman Sachs, which expects oil prices to finish the year at $85 a barrel, is predicting a big supply deficit: 1.4 million barrels a day on global oil demand of 87.8 million barrels a day. Its forecasts are closely watched in oil markets because they are big traders of commodities.

My best guess...

Oil will follow historical seasonal pricing patterns (weak in the fall) and negatively impacted by warmer than average winter in the U.S. (hey, remember we have global warming!). I expect we see the price of oil start to fall this month...and the OIH falling along with it.

Plays of the Day

From my earlier post. You need to be an agile and quick trader to catch FXI today.
Not me unfortunately.

Look at the volume spike, that was the key on EWZ.

Oil trend is lower I believe. Watch for more short opportunities.

I caught part of this move today, but less than I would have liked. Tech is riding strong this week, but could be setting up for a reversal. Two options, short QLD or long QID.

TRADE SIZE:
I try to keep my position size below a maximum of $50K per trade, which would restrict my maximum share size as follows:
FXI = 300 shares
EWZ = 500 shares
OIH = 300 shares
QLD = 500 shares

Had I executed all these trades with the gains given, my profits would have been:
FXI = $1,440
EWZ = $500
OIH = $1,800
QLD = $1,000
TOTAL = $4,740

If only it were so easy...

Trading the Coming Oil Price Drop

It looks like the price of oil could have peaked and will soon be entering the weak season. Lots of hedge funds are in this commodity. Once the sell off starts it will cascade quickly according to Bloomberg analyst. Oil may drop into the $70's...a drop of about 14% from the recent highs.

Oil related stocks and ETFs would be pushed down.

This could set up for a nice short on XLE, OIH or USO. They are already off by 1.5% today.

I might even consider the ultrashort DUG although its trading volume is far below my 1M criteria. This would likely be a swing trade.

UPDATE (post-close):
From Briefing.com: Another drag on the broader market was the energy sector (-0.9%). It got clipped along with oil prices, which dropped 1.8% to $79.50 per barrel. The decline was attributed to profit-taking from an overbought condition and a lessening of near-term supply concerns after a weekend storm passed through the Gulf of Mexico without incident.

From Bloomberg: Crude Oil Falls Below $79 as Naimi Says Markets Are in Turmoil

Crude oil fell below $79 a barrel in New York as production resumed after a storm passed through the Gulf of Mexico and Saudi Arabia's oil minister said energy markets are ``in turmoil.'' The market is in turmoil, let's leave it at that,'' the minister, Ali al-Naimi, said today in an interview in New York. He wouldn't comment further.

Crude oil fell as low as $78.96 a barrel on the New York Mercantile Exchange today as output increased in the Gulf. Prices have risen 31 percent since Jan. 18 as demand increased and OPEC members curtailed output. Prices shot to a record after an OPEC decision last week raised concern that supplies would be insufficient to meet demand during the winter.

``To a certain extent, Al-Naimi's right, the market has got completely confused with the financial aspects, the banking in collapse,'' said Rob Laughlin, a senior broker at MF Global Ltd. in London. ``He's just saying the recent spike up is overdone, and they're looking for an understandable correction.''

U.S. crude-oil inventories in the week ended Sept. 14 were 7.4 percent higher than the five-year average for the period, the Energy Department said last week. Supplies probably dropped 2.15 million barrels last week, according to the median of responses by 16 analysts surveyed by Bloomberg News.

The department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington.

``If tomorrow's crude numbers are a bullish surprise, we could get one more rally before this thing moves lower,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.