Thursday, May 8, 2008

Did Oil Prices Hit A Short Term Top?

As Goldman Sachs announced higher oil price expectations, it means they currently look to liquidate their oil related holdings. Therefore it becomes highly probable that oil prices will drop in the near future.

How did it get this high in the first place?

The media always pushes for supply and demand concerns, but as we know TV anchors do not usually understand how markets function (if they did they would not need to work as TV anchors obviously).

A patron at, S2007S, made a very wise comment about this situation.

“… If you really think an economy thats already in a recession can handle 100+ oil and over $4.00 at the pump you are a fool. Today people are predicting 150-200 a barrel, Pure SPECULATION, thats ALL THIS RUN IS BASED ON, this reminds me of every other single bubble, all the hype and the outrageous predictions on how high oil will go is just a becoming a game now. This is a bubble, oil and the rest of the commodities are going to correct EXTREMELY HARD, Just like every bubble ALWAYS does...”

Profiting off this information

You can take short positions on oil based ETFs such as USO, OIL, GSP, and etc. If you do not feel comfortable with directional bets, option strategies exist to exploit the coming volatility, and most of these ETFs have options available.

Of course solid entry/exit plans remain crucial to profitable trading, and inherent risks need managed, especially that of position sizing while taking short sales. The above edge only helps in the regard that even if your execution carries no finesse, it could still end profitably.

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