Posted May 04, 2020
By Alan Knuckman
Banking a Quick Double on an Oil Snap-back Trade
Traders left oil for dead
Thats when I pounced!
During the disastrous crude meltdown last month, I told you that anyone who lost money as the May contracts melted down must have worked very hard to get caught in the downdraft. Remember, only a handful of May positions were left that hadnt been closed out and a reverse short squeeze got the "smart guys" who were playing with fire. It was strictly a May contract settlement issue not any systemic issue.
But that didnt stop the financial media from declaring that oil was headed to zero!
You know better than that. As traders, were not looking at the oil rout as a total disaster. Far from it. Instead, we want to profit from the panic.
Consider whats happening in the marketplace right now. First, were seeing higher lows in crude following last months rout. As of early Friday, June contracts were once again fighting back above $20. Were also seeing signs of stability if we look further out at the July, October and December contracts. The main problem in the oil market is that no one wants the oil right now. After all, where are you going to put it?
I look at a move like this and see opportunity in the energy sector. Like I always say, its usually best to be buyer when things look bad and sell when things look best.
Thats why I urged my readers to scoop up calls on Valero Energy Corp. (VLO)just as oil prices were sinking toward multi-decade lows. While the coronavirus panic greatly reduced the demand for gasoline in the US, it was no surprise that Valero Energy pulled back and attracted a negative media narrative. But I noted that twoVLOdirectors picked up a total of $2 million shares in the company. Taken into account alongside the slew of insider buying, we were expecting good news to spark a rebound.
VLO rebounded even as oil crashed!Did we perfectly bottom tick the price of oil on this trade? Nope and it wasnt necessary. Our early April buy signal allowed us to bank a quick double with our VLO calls, even as oil posted its historic plunge.Thats how you profit from the panic!Keep it In the Money,Alan Knuckman
Chart of the Day: Where will stocks go from here?April was an amazing month for stocks.Following the brutal pandemic-induced selloff, we were treated to a powerful rally off the March lows as the major averages advanced double-digits. It was the biggest monthly gain in more than 30 years, CNBC notes, and the third-largest monthly gain for the S&P 500 since World War II.That leaves us with the million-dollar question: Where will stocks go from here?May trading started off on the wrong foot Friday morning as the averages dragged into the red following Amazons earnings announcement. Its not that Amazons results were particularly terrible, either. I suspect that the herd was hoping for the king of online retail to deliver impressive numbers since virtually the entire country is relying on delivery during the coronavirus shutdown. Instead, the company issued this warning:If youre a shareowner in Amazon, you may want to take a seat, because were not thinking small. Under normal circumstances, in this coming Q2, wed expect to make some $4 billion or more in operating profit. But these arent normal circumstances.Buyers certainly took a seat Friday. Amazon shares continued to slip throughout the session, falling more than 7% by midday:
Next support for Amazon sits just below $2,200. But fear not, the stock is still soundly beating the market this year. Even factoring in Fridays fall, its up more than 20% year-to-date.-- Greg Guenthner