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[Jhoe]

Was already long oil from the last trip down to this 95 area back in mid-may, sold half and hedged the rest late last week as we tested/then failed the third time along the may downtrend line. Sold the hedge today, was using USO june 38 puts. The technicals are tricky here, I won't sugar-coat it. After the huge move down in early May, nearly 20% in just over a week, price consolidated along the top of the old downtrend line from 2010, right around 95/96 for nymex crude. After a sharp move back up to 103 or so, we've bounced around from that high to 98 or so, forming sort of a continuation triangle. Ordinarily, that triangle would be bearish--a symmetrical triangle usually signals another leg down and perhaps signals that the consolidation is a "B" in an ABC correction. The trade is to enter long or short depending on which trendline breaks first, the downtrend line or the converging uptrend line. We broke below the uptrend line with the huge down day last friday, and its been a quick 7%+ down in a matter of days. In addition, this recent consolidation could be forming the right shoulder of a head/shoulders on the daily chart. The neckline comes in just about 94 exactly on my chart. So, aside from the bullish butterfly, sounds ugly right? Why enter long here? Well, harmonics, ie butterflies, by nature are reversal patterns. The goal is to try and find an entry with a well defined, and very tight, stop loss, that provides good risk/reward accordingly. Harmonics often work because other technical patterns have caused price to break support/resistance levels, and provided another round of selling thats pretty nasty because stops start getting taken out and traders start pounding price in whichever direction is working at the moment. For crude, thats obviously down at the moment. Then, if/when price reverses, that same momentum and possible flock of weak hands that got in after support/resistance broke (in this case, potentially any shorts who got in this recent drop too late, ie after crude was already below 98 or so), are the gun-powder needed for the counter-attack to commence. Aside from the butterfly, I was watching closely to see what happened at that head/shoulders neckline today, since it coincided pretty closely with the 1.27 Fib extension of the butterfly thats formed the last 30 days or so. We bounced fairly strongly there, as opposed to the sellers being able to push price below the neckline and take out more stops and further accelerate the move. Long story short, this looks like a high-probability "bear-trap' to me, or "false breakout" if that term makes more sense. For all intents and purposes, it looks like a pattern we've seen in crude many many times the last couple years--head and shoulders top, then price suddenly reverses when it gets down to the potential neckline, and that reversal point is often the low before a higher high is made. Refer to Sept 2010, Nov 2010, then again in Feb 2011 for the last 3 instances. Then of course, the shorts who were looking at the continuation triangles and head/shoulders as entry points got squeezed by their throats, especially in Feb with the whole Libya ordeal suddenly catching everyone's attention (despite its existence for quite some time prior?). Could I be wrong? Sure, so I've got a stop placed just below today's low of about 94 even. Typically when a support/resistance level, as we are on with this H/S neckline, holds the 3rd test (just like in the consolidation triangle) the next move is powerful and swift in the other direction. Thats whats happened thus far. My stop is just below today's low because it represents where a 4th test could occur, and there's usually no such thing as a fourth test of a support/resistance area because if price gets back to 94 or lower, we'll see a pretty rapid move down to below 90 again, potentially below 85. Or, if I'm right and this is a false breakout/breakdown, the 94 area wont be seen again anytime soon.