Fundamentally, how serious should we take a WTI crude (NYMEX:CLN14) oil market that trades on emotion and tension in the Middle East? Is there not always tension in the Middle East? With trouble in Tikrit Sadam Hussein's hometown, among several other cities in the north of Iraq, and militants advancing toward Baghdad, WTI crude has spiked in a big way.
One day last week, New York traded WTI crude oil blasted off on news that China was buying oil to build a Strategic Oil Preserve or SPR like we have here in the U.S. and the fact that OPEC was going to keep daily production unchanged at about 30 million barrels /day. OPEC produces about 30%-40% of all the world's oil.
Well, the market closed lower and well off of the highs the last couple of days. In my view it is time for profit taking and for crude to trade on facts and not emotion. The high Friday the 13th for August WTI crude oil was $106.84/barrel and the low was $105.64/barrel. Currently, Monday the 16th we are trading at $106.22/barrel in the August contract and the high today was $106.78/barrel. One could wonder if the market was running out of steam.
The bottom line is that the militants are NOT in the south yet and not one drop of oil in Iraq has been affected. More importantly, Saudi Arabia produces more oil than all of the other OPEC nations combined and I believe they can and will cover any shortfalls in production. Also let's not forget here in the U.S. we are still sitting on massive amounts of crude oil supplies in my view.
Technically, on this June daily crude oil futures chart I have applied my favorite technical indicators like the 9- (red line), 20- (green line), and the 50- (blue line) day Simple Moving Averages (SMA's), the Bollinger Bands (BB's, yellow lines), and Candlesticks (green and red bars, where each bar represents a day).
Technically, my favorite indicators show me that the August crude futures are in my coined "Super-Trend" up. The reason I call this a "Super-Trend" up is this. The 9-day SMA (red line) has crossed up and over the 20 day SMA (green line) and both the 9 day SMA and the 20 day SMA are pointing higher on a very sharp angles and the market itself is trading above the 9. The 9 is now according to my favorite technicals the first area of support and then the 20-day SMA.
However, I believe this market is extremely over bought and due for a correction and I am not one to pick tops. NYMEX crude oil is not only well above, but too far above the 9 day. My goodness, it's above the top line Bollinger Band (BB, yellow line).
Technically, even though virtually every one of my favorite indicators are pointing higher on this chart there is something to be said for profit taking in an overbought market as well as the support areas that I believe the market will come back to. Let's wait and see what happens as this market has moved about $5.27/barrel in the last 9 trading days.
I pride myself on being a "trend trader" and trying to make recommendations to my clients with options that place us in the direction of the existing trend, which in this case is clearly up. But, it's over bought in my view and already made a significant move higher in a short amount of time and I am a cautiously optimistic bear right now.
I would recommend buying puts or put spreads with a call for a hedge or "insurance" in a 3 to 1 ratio. I would also recommend selling deep out of the money calls as well.