Tuesday, August 19, 2008
Oil Shorts Covered, Go Long Gold & Oil
When did I become a commodities trader? Unlike most commodity traders, I do not trade the volatility or very short term trades. I tend to look at sentiment and momentum and compare that with the "noise" in the market place, all the time assessing the underlying fundamentals.
The first short position on oil was at US$139, the double up position was taken at US$119.90. The shorts were covered at US$112.90. I initially was waiting for US$110 to be broken.
My reasons for covering:
a) The open interest on oil futures was only about 43% when oil was at US$130, now its closer to 70% and mostly on the short side. The hedge funds and index speculators were not only unwinding and deleveraging, but taking the short side as well in most commodities. The fact was much clearer in gold price movements over the last 2 weeks.
b) Despite the cumulative shorts, the momentum does not seem strong at all to push to test the US$110. If things don't look likely, it will move the other way.
c) The US PPI though a lagging indicator is worth considering. It was pretty significant and may take a few more months to ease down.
d) I still hold to the strategy that the upcycle in commodities is still intact. Though we may not test the highs again this year, it will at least gain back some significant ground.
e) My final conviction came from gold price which broke US$800 too easily but almost as quickly retestes the US$800 on the upside. Its been down below that level again. Its a good sign of price movements in an oversold instrument.
f) I was a bit surprised that the Russian-Georgia issue did not prompt a strong rebound, again lending weight to the strong shorts momentum. Now that the selling did not look likely to break US$110 on the downside, more sober minds would dictate that the Russia-Georgia thing is mostly about controlling a very major oil pipeline.
Link to previous trades:
Long oil futures $113.20
Long gold futures $802
p/s photos: Amanda S (aka Amanda Strang)