Oil Correction Oil Correction: The Turnaround
By Eric J Fry
The Rude Awakening
Wall Street, New York
Wednesday, May 3, 2006 ------------------------- - Three down and one up...all the tears that went into
a dollar of oil,
- How to ensure you are on the smiling side of the
oil correction,
- Getting onboard with the smart money, all the market
data and plenty more...
------------------------- [Joel's Note: Yesterday we released a special investment
alert penned by our good friend and colleague, Dan Denning.
The former Washington Insider and author of the widely
successful book, The Bull Hunter, has some insights into
the state of the American economy burdened by the cost of
the war on terror. If he's right (and he usually is) you
will need to be aware of how you can protect yourself, and
you wealth. Just in case you missed yesterday's special
report, here is a link for you to check it out now. Protecting Your Wealth From Terror:
http://www.isecureonline.com/Reports/DRI/EDRIG415 --- Special Investment Alert --- 204% Gains... 4 Minutes A Week Playing Crude, Gold, Silver... In just 6 months, you can make 204% gains GUARANTEED
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and even SOURS when stocks fall apart... Find out how to triple your money now! "Crude oil has become one very hot commodity...enticingly
hot," we remarked last Tuesday, while suggesting that
investors "steer clear" of this market for a while.
Immediately after our column appeared, the price of crude
oil took investors on a very wild ride – falling three
dollars over the final three trading days of last week,
then jumping four dollars over the first three trading days
of this week...Voila! A one-dollar gain! This sort of hair-raising volatility does not endear us to
the crude oil market, especially when several important
indicators are flashing amber. Thus, we would repeat our
warning from last week: "Go ahead and flirt with this
'hottie,' if you must. But we'd hate to see you get hurt."
U.S. crude oil inventories remain some 11% above their 5-
year average, which is probably reason enough to back away
from crude oil and from oil stocks. But options pro, Jay
Shartsis, provides a second compelling reason: Oil Correction: The Options Indicators "The 21-day dollar-weighted put/call ratio on crude oil
futures currently shows about 25 cents in puts traded for
every $1.00 in calls," Shartsis notes. "This is an
EXTREMELY bullish reading, which, as a contrary indicator,
is very bearish. This option reading shows the most trader
optimism in many years. For perspective, 25 cents in puts
versus $1.00 in calls is WAY down from readings last
December when about $1.75 in puts traded for every $1.00 in
calls. (December was, of course, a great time to be BUYING
oil and oil stocks). "The current reading, however, is exactly what one could
expect at a top," Shartsis concludes. "Given the situation
in Iran and elsewhere, I have to admit that it's hard to
imagine that oil is going to drop. On the other hand, this
overly bullish options reading suggests that all the well-
known bullish factors for oil are already priced into the
market. 
"Sell oil stocks?...Probably." Most of the commercial crude oil traders seem to agree with
Shartsis. In recent days, the "commercials" have been
adding to their already-sizeable short position in crude
oil. 
As we have noted in several prior columns, the
"Commercials" are considered the "smart money," based on
their tendency to position themselves correctly at
important inflexion points. By contrast, the "large
speculators" tend to position themselves incorrectly at
extremes. Oil bulls, therefore, will find little comfort
the fact that the large speculators are buying crude oil
aggressively...from the Commercials. 
Oil Correction: Rare Extremes Lastly, we would point out that the price of crude has
reached a rare extreme relative to the price of natural
gas. Only four times in the past decade has crude oil
reached a price that is 11 times greater than the price of
natural gas. After each of the three prior instances, the
price of crude oil fell sharply over the ensuing weeks.
Specifically, after this ratio peaked in March of 1997,
crude fell 15% over the next two weeks. After the peak of
March 2000, crude dropped 30% in four weeks. And after the
oil/gas ratio peaked in September of 2001, crude tumbled
35% in eight weeks. We would not dare to insist that history will repeat
itself, but neither would we dare to rule it out. [Joel's Note: A great way to take advantage of this recent
volatility in the markets is to play the options game. Of
course, you will want to have someone with a stellar track
record on your team to maximize returns. Not too many
traders can boast a record as rock-solid as options guru,
Steve Sarnoff, the perfect man to have in your corner.
Learn all about cashing in on volatility right here: Opting for Profits:
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investment circle today! http://www.isecureonline.com/Reports/RCH/ERCHG501/ ------------------------- And the Markets... | Tuesday | Monday | Week-to-Date | Year-to-Date | DOW | 11,416 | 11,343 | 0.6% | 6.52% | S&P | 1,313 | 1,305 | 0.1% | 5.20% | NASDAQ | 2,310 | 2,305 | -1.4% | 4.74% | 10-year Treasury | 5.11% | 5.14% | | | 30-year Treasury | 5.20% | 5.22% | | | Russell 2000 | 768 | 761 | -0.6% | 14.02% | Gold | $669.10 | $655.10 | 5.5% | 29.42% | Silver | $14.09 | $13.86 | 7.9% | 59.84% | CRB | 357.02 | 355.22 | -0.4% | 7.59% | WTI NYMEX CRUDE | $74.58 | $73.67 | -0.7% | 22.18% | Yen (USD/YEN) | JPY 113.31 | JPY 113.31 | -2.9% | 3.91% | Dollar (EUR/USD) | $1.2620 | $1.2588 | 2.2% | -6.60% | Dollar (GBP/USD) | $1.8404 | $1.8256 | 3.2% | -6.95% | Dollar (AUD/USD) | $0.7622 | $0.7595 | 2.3% | -4.01% | Franc (USD/CHF) | $1.2372 | $1.2410 | -3.0% | 5.56% | Dollar (USD/CND) | $1.1067 | $1.1135 | -2.7% | 4.60% |
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