The High Price of Oil

In less than four years, the price of oil has risen about 300%, or more than $ 50 per barrel. The Light Crude Continuous Contract (of oil futures) hit an all-time high at $ 67.80 per barrel Friday, and closed the week at $ 67.40 per barrel. Sustained high oil prices will ultimately slow economic growth, which in turn will lead to oil prices fall, ceritus paribus.

The two graphs below are same period daily charts of SPX (S & P 500) and OIH (an oil ETF, which is a basket of stocks). More than 15% of the SPX are energy and utilities stocks. The two graphs below SPX started the recent rally about a month for OIH. The graphs imply non-energy & utilities stocks fell last week or so, while the energy and utilities stocks remained high or increased further.

SPX held its 10 day MA to just over a week ago, while OIH continues to hold its 10 day MA. The Parabolic SAR (red dots) SPX is giving a sell signal, while OIH remains the buy signal. SPX should rise to about 1242 3/4 to trigger a buy signal, and OIH should fall below 115 3/4 to trigger a sell signal (see top left graph).

Perhaps, it would be safe to play waiting to close below its 10 day MA on OIH or fall below the Parabolic SAR Buy-level. However, I think if oil tests $ 70 (for example, next week or next week), the OIH sell signal, and perhaps an excellent opportunity to buy OIH September move (or turn on overvalued stocks) will be.

SPX has sold over the weekend in the past three weeks, which usually bear market behavior. However, next week is options expiration week. So, will somewhat skewed towards next Friday. The following are current August Max Pain expirations: SPX 1225 with the value of calls about three times the value of the puts (which is bearish because the put / call is a contrarian indicator). SPX closed at more than 1230 Friday. OEX (S & P 100) 570 with the value of the bucket than three times the value of the call (that is bullish). OEX closed at around 571 Friday. 39 QQQQ puts twice the value of the calls. QQQQ closed at about 39 1/4 Friday. It is interesting that the OEX put / call is about the mirror image of the SPX put / call, which may indicate institutions, which tend to buy large cap stocks are skeptical of a rising stock market.

Economic reports next week are: Mon: Empire State Index, Tue: CPI, industrial production, capacity utilization, building permits, and Housing Starts, Wed: PPI, Thu: Unemployment Claims, Leading Indicators, and Philadelphia Fed. Q: None. Recent data showed slowing and above trend growth with disinflation. A higher utilization rate would indicate. Future inflation The high oil price has a tendency to slow economic growth rather than cause inflation (in part, because the high price of oil is a tax on consumption, increasing the demand for non-energy goods decreases).

The big game can buy in September when put OIH and overvalued stocks bounce because OIH SPX was able to continue. Also options expiration week tends to be volatile, and the trading range to continue. So, there may be several other excellent trading opportunities next week.

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Arthur Albert Eckart is the founder and owner of Peak Trader. Arthur has worked for commercial banks, eg Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds 1999-00. Arthur Eckart has a BA and MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has to maximize a comprehensive trading methodology using economics, portfolio optimization, and technical analysis and minimizing risks developed at the same time. This methodology has resulted in excellent returns with low risk over the past three years.