Why Oil is Rising

The Friday before Memorial Day tends to be lackluster with light trading. The market is closed on Monday.

First, a good question from new trader MP:


Hey Floyd,

I'm a little frustrated over here. I feel like everyone is enjoying this party and I'm left shaking my head as to what went wrong.

I've got some questions for you. I think that maybe I am over analyzing things and trying to make the perfect trade. I don't know. Hopefully you can help me figure out where my focus is and what I need to change.

Here goes:

Yesterday you wrote:

"Read our Dow projections. Bottoms may NOT be finished, but whipsaw is likely. The market held at a strong resistance area of 12,740 today. We'll enter puts one more time, but the risk is increasing." How or why do you decide to enter puts again after a 200 pt. drop in the DOW. That seems kinda gutsy. What makes you decide that? And when you say that the "risk is increasing", what exactly do you mean by that; does that mean you have less than a 50/50 chance?

Simple answer. I saw an additional downside. The move was not yet over. I knew the FOMC minutes were coming out and it was likely they would curtail the rate drops. The 21 day cycle was not complete, it was time for more downside to what we just hit.

All is not as it appears. The news will tell you that yesterday's drops were caused by " fill in blanks". The market drops were ALREADY coming, and the "fill in blanks" was just the catalyst for the downside. When you say that the market was already coming, are you saying that the supply was greater than the demand and that there was no way to stop it?

News merely triggers what already is. The reverse of what people expect. Oil and FOMC were the trigger to moves that would occur


When you put out the early morning alert about paying up to 10% over prior day close, you also wrote to me privately saying that though you may suggest that kind of strategy at times, you still never do it. This gave me the impression that I should not do it either. I figured that "If Floyd isn't doing it, then there must be a good reason so I better not do it either. I've got months experience and you've got years." That's OK too. I'm actually pretty proud of myself that I followed that rule because it showed that I had some discipline. However, the bottom line is that for the past two days, I didn't enter because I couldn't get filled less than prior day close (I missed it today). When and if that happens to you, how do you have peace with that b/c I'm kicking myself right now that I didn't get filled for at least 10.00 today. I just didn't have the guts to get in b/c you stated this morning that "We 've been right so many times in a row that our risk is also increasing, and that the chance of downside with a count of 5 to 6 to the put is at 55%." When I read something like that, being so new at this, it's hard for me to risk my money. What suggestions do you have for someone in my position who is experiencing this kind of hesitation?
Nothing. My ratio of wins is extraordinary right now. I'm simply sharing with greedy subscribers to recognize that this is option trading.
I NEVER worry if I don't not make money. I only worry if I lose money.



Last week I wrote to you regarding entering a position. I told you that I seem to always enter too early. I asked you how soon you enter a position in the morning and you stated that you like to wait for an hour to see what the market is doing. Looking back at the plays that I've made, I realized that if I did it your way, I would have made out much better. However, today, that strategy hurt me. How do you know when to hold out for before entering and when to get in right away like people did today?
Only by experience, and a bit of control. I do sometimes put best buy prices in prior to market; it all depends upon the count of the market.


And lastly,

Here we are with the DOW 400pts. down in 2 days. We've gotta be close to a bottom as you suggest. You put out an alert for the 630 call for 15.50 or less. Of course I wasn't able to get filled for that price today and I followed your suggestion of not chasing it up. You also tell us to be prepared to make a larger second buy. I am a bit confused. If we are almost at the bottom, what second buy is there going to be? Isn't this puppy going to be rising like a bat out of hades? You say that
Deeper bottoms are now possible, but we'd think a low of 12,470 might suffice, and also believe the market may now have an exhaustive gap upside.
What is an exhaustive gap upside? Does that mean we are going bullish? OR does that mean we are slowly going to rise? Should I wait for the DOW to drop more and enter at 15.50 or less or do I try to get in on this 630 call asap. It closed at 16.00 and as I type this, the futures are +14 (I realize that at this time of the evening, that doesn't mean much). Anyway, I am a bit concerned about my entry into this position. I don't want to miss the play like I did in the last two days but I also don't want to do something stupid. Any suggestions?
At times I may enter too early, just to be sure I am entering. A second buy only assures and allows the trader profits if I do enter early. I entered as the market hit my bottom. It may now go another bit lower, although doubtful, and if so, we'll simply increase the position for the next move.
Do not worry about missing plays. There is always a chance to buy. Doing the worrying is what creates FEAR and GREED.
This is what destroys the trader.


I appreciate you taking the time to help me. I am working hard over here. I'm taking it slow and I'm up $1400 on the year so far (it's only been two weeks). I want to trade smart that's all. I love your service and I'm thrilled to be a part. When I earn more money, I want to sign up for Blue Chips and advanced mentoring. I am reading Dorsey and I think it's great.

Forgive me if I hound you too much!!

Again, I appreciate your time and advice.

Mike

PS - I bought a hand held device today like you suggested. Now I can watch my trades while I'm with my girls at the park!! I'm so pumped!! When you are using your iphone, what do you focus on? DOW? Option prices? Charts?
Just Dow. I keep all noise out of trading.

Second, here's why oil is rising. It's not the "evil empire" as Emperor Bush says, it's NOT Saudi Arabia et al raising the prices.

It's Wall Street, and it's the DEMAND:

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update1)

By Alexander Kwiatkowski and Grant Smith
May 22 (Bloomberg) -- Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude futures yesterday gained 3.3 percent to $133.17 a barrel for July delivery, the largest advance since May 2 on the Nymex, and touched a record $135.04 today. Oil rose after a government report showed U.S. inventories unexpectedly declined last week. Oil has more than doubled in the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.

``It is not a growing market, it is a shrinking market in terms of open interest,'' said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Swizterland. ``It is also facilitating the move upward.''

Shell's View

Oil prices have closed at record highs on 27 days so far this year, prompting OPEC oil ministers including Saudi Arabia's Ali al-Naimi to declare that the rally is led by investors, rather than a shortage of supply.

Crude for delivery in December 2016 ended yesterday at $142.09 a barrel, signaling investors anticipate prices will gain for years. Some traders speculate oil will reach $200 this year. The price of a December 2008 option contract that allows the holder to buy 1,000 barrels of crude at $200 each jumped 67 percent in three days to $1.72 a barrel yesterday on the Nymex.

U.S. oil executives told Congress yesterday that prices should be between $35 and $90 a barrel. John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell Plc, pegged the proper range ``somewhere between $35 and $65 a barrel.''

Saudi minister al-Naimi said in March when oil was trading near $100 that prices were unlikely to fall below $60 or $70, representing the cost of producing alternatives such as biofuels or tar sands.



Third, from trader PC:

I have almost double my IRA had $12000 4 months ago and now have $23500 in it. Things have been going great trading. I have not even traded more than 20% of my capital to do it either. Usually 1 contract sometimes will buy down as things appear attractive. Just trading OEX on Dow projections, P & F charts, pivot points calculated daily, FIB levels from long term levels, and long term trend lines. Its worked very well. Of course reading the alerts and your advise to help guide my decision process. The great thing is now that I have not been relying totally on you to trade. I have had many successful trades on my own using what you have taught me.



Fourth, from trader TP

I bought calls today two times at 15.5. Just put the order in early, was thinking maybe no trading today oh well, boom filled. After I sold the first batch I put in an order for $15.5 and thought if this gets filled that would be cool, and it did, and sold again. When it works, it works.



And lastly, the market. The Dow moved right to our 12,690 Top (sorry, also wrote this as 13,690 yesterday but I'm sure you all caught that the market would not move up 1000 points:)). The Dow hit a theoretical top of 12,709 on Thursday. The June630C, bought at 15.50, hit highs of 17.60. We'll keep this position open.

As noted above, trading may be light today, but the market will continue to struggle. Oil at rape prices is concerning to all.