Tempted?

I wonder if any of you have been tempted to step in front of crude given its failed attempt this week to get through the century mark? It’s an aggressive trade, to be sure. Certainly several reasons some aggressive peeps are considering it…

First up, many traders attribute the recent run to the widely held belief the Fed was on the verge of instituting yet another round of stimulus to brace up the economy. While there is much debate as to what another round of easing will accomplish for this economy (questions linger still regarding the effectiveness of QE2), what is sure is that QE3 will take a toll on the greenback…and in theory should propel dollar-denominated commodities.

Well, Ben and Co. have stutter-stepped the market and the anticipated stimulus-friendly Jackson Hole party is suddenly lookin like a dry hole for those hoping for a QE3 announcement. Moreover, you get the feeling now that the Fed may be very reluctant to take any action prior to the Presidential election. With such a backdrop, a short on crude starts to look sorta sweet….

Another factor tempting crude bears is the fact that WTI climbed more than 11 percent on the month when it went through the 98 mark a week ago. Even after this week’s retracing action, black gold is still sportin a gain on the month north of 7 percent. No doubt that’s a big gain in short order. But it’s nothing compared to the 27 percent price gain since crude pulled a Houdini in late June. Put in that light, too-far too-fast seems pretty reasonable and a short starts to look more attractive.

Then there’s the profile on the map itself…

From the current level (94.62) you’re easily looking at more than 4 points of projected downside into a test of 90ish if we don’t hold here. Failure at that point and the next real stop is 87ish. Moreover, crude bulls will start to pucker and the June low, although still a good clip further south, will suddenly loom large in the minds of all traders and the pull of gravity will start to take effect.

Like I said, easy to see where some aggressive crude bears might be lickin their chops. Frankly, I was ready to take a bit of that pie myself…mite still…

Stepping back a bit, as I am apt to do before entering swing trades I anticipate trying to ride for days to weeks (especially with crude), I am given pause looking at the longer-term chart.

There’s no doubt crude is coiling on the monthly map and resolution looks sure to happen sometime in the not too distant future…but not necessarily yet…

If it keeps true to its pattern dating to mid-2008, then the fact is we are sitting in the middle of an upside cycle-leg and the momentum is still favoring the long side. If that read is correct, then crude should trade to 102ish to fulfill its pattern. From there we’d have to see what happens—trend adherence would see it perform a mean-reversion move back to support… A break and we’d see a test of the March highs up at
$110.

Tempting…you bet. For now though, gonna hold tight and let the map fill in a bit…I’d be more eager after a $102 test. Food for thought……

~LH