By Thomas H. Kee Jr.
Last week we closed a short-oil (meaning we were short the commodity) position and secured 20% in gains in a very brief time. We bought Proshares Trust II /zigman2/quotes/200164023/composite SCO +3.23% near $80.50 and we sold SCO near $97.25, taking only nine trading sessions to do that. But after the G20 meeting and the comments between Russia and Saudi Arabia, I completely expected oil prices to have spiked as the market opened on Tuesday.
On Monday, when U.S. markets were closed, overseas markets saw significant gains in oil prices on the heels of joint comments from Russia and Saudi Arabia. But overnight, there seems to have been a discrediting of that reaction, and an interpretation of the joint comments lacking conviction with regard to actually taking action on supporting oil prices.
Instead of the position that we closed being down approximately 10%, which seemed likely given Monday's overseas action, SCO was only down fractionally.
In large part, this is also discounting the special informal meeting that is taking place in Algeria on Sept. 26, and in turn discounting the probability that any support for oil prices come from that meeting. This is an interesting turn of events because the Russian/Saudi Arabian comments would suggest that they are both at the table and willing to take action, instead is resulting in the air being let out of the sails in terms of hopeful production caps, so to speak.
Oil prices have already been on a negative trajectory. The ProShares Ultra DJ-UBS Crude Oil /zigman2/quotes/208496666/composite UCO -2.92% , which is the trading instrument that we use to determine entry and exit prices for oil, had fallen from over 14.00 to as low as 7.75 before stabilizing at slightly higher levels, but the chart pattern we have identified in UCO suggests that downward path can continue.
Importantly, this observation has nothing to do with the meeting in Algeria, but that oil prices typically react well to technical observations and anticipate news.
Although our profit stop in the short-oil trade was hit last week and we secured gains, the chart patterns suggest that if UCO makes a lower low than last week, it can drop even further, below 7.75.
We consider the relatively muted two-day reaction to comments that should have bolstered the market to be a warning by the market itself that the upcoming meeting may not result in an agreement to cap production as previously anticipated.