BLACK GOLD

Many traders/investors are holding on to oil shares and wondering where the floor on crude maybe and how high the price of crude could possibly go. Sara Conway, writes her opinion in a terrific article on TradingMarkets.com today and I quote:



"Now that the Crude Oil price has broken out above its range of the year, how high could prices possibly go? One way to calculate a price objective for securities is to measure the range that the security traded in previously, and then project that distance forward from the top of the previous resistance. In the case of the continuous crude contract ($WTIC), the bottom of the previous range in 2006 was at approximately $59.00 and the top was approximately $69.00. The $10.00 difference is then added to $69.00 to obtain a new price objective of $79.00. Once (or if) crude oil prices break above $79.00, a new price objective can be calculated. The contract closed yesterday at approximately $73.33. Is it O.K. to buy (the commodity directly or oil related shares) now or should investors wait for a pullback? To answer this question, it would helpful to know a downside objective in addition to the upside objective of $79.00 that was previously calculated.

An impressive point about this chart is the fact that the break above the prior resistance formed a rising window (or gap). This defines the range even more definitively and likely establishes a new range for the commodity. The gap should serve as support on any decline and also the previous resistance at $69.00 should now serve as new support.Therefore, you could feasibly use any drop below $69.00 on the close as a stop point. In order to calculate a real risk reward, you take the price objective of $79.00 and subtract the current price of $73.33. We have a possible reward of $5.67. Conversely, we have a possible risk of $4.33 ($73.33-$69.00). The reward is greater than the risk, but by only a margin of 1.3 ($5.67/$4.33).

Going long a security with a risk reward ratio of 1.3 is not viewed (by me) as highly aggressive. However, because some of the other tools that can be used to help determine overbought/oversold levels are at the top of their ranges, I would prefer to wait for a little bit of a pullback here. Please notice that since the 19th, the lows of the contract have not gone below approximately $72.65. This could also serve as another piece of support and is likely a good buy in point as well. Put your orders in at slight pullbacks (but not deep retrenchments)."

Bottom line, Sara sees the bottom of the range to be the $70 area (high of the prior range), and a possible top at $79. The rationale certaintly sounds correct and is perfectly logical and there is one other factor going for the longs, a spike due to problems in VEN, Nigeria, Iraq, Iran, Saudi Arabia yadda yadda yadda.