Expect Gasoline to Stay Range Bound

by Jay Pestrichelli on May 29th, 2012

As summer un-officially kicked off after the BBQ’s of Memorial Day, it got me thinking about gasoline prices again. On May 7th we wrote about falling gas prices and the consideration of shorting UGA, the gasoline ETF, or shorting ERX, the 3X energy ETF.  Feel free to click to reference Gasoline Pulls Back.

So far that trade would have been profitable, but we’re not sure how much farther this will go. ERX has not only felt pressure from the decline in gasoline prices, but oil as well. As oil hits a speed bump of support at the $90 level, it’s time to consider a pause for the decline in energy overall. We re-affirmed just this past Thursday our bullish bias in energy long-term and from a trade perspective these two thoughts are beginning to line up.

Energy will be one of the first sectors to show a bounce if any good news comes out of Europe giving strenth to the Euro, which is a total crapshoot at this point. And of course there is always the lurking conflict waiting to rear its ugly head out of the Middle East. However bad numbers out of China or the US can send energy down a little further. Unless something extreme occurs, these pushing and pulling forces will bind energy between the bumpers of the last 12 months.

If you’re already short UGA or ERX, time to harvest some of those gains. You can do this by moving those hedges or sell some July puts for a decent short-term credit. If not, consider putting on a trade that will profit from a range bound performance. Our Buy and Hedge ETF Newsletter on Minyanville will have more details about this trade, but in general, this range means UGA up or down 10% for the next month (46 to 56) or ERX within a 30% move (26.5 to 49.5).


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