The Right Way and the Wrong Way to Trade This Oil Bust – Wall Street Underground

By Nick Guarino | August 5, 2008

I want to reiterate my absolute firm conviction that oil has begun a bust that will take it to $10 a barrel. All the trades and recos in the Stampede Audio Files and in Nick Picks stand — with one exception. The old reco for the ETF DCR has been replaced with a new recommendation for the ETF Macroshares 100 Oil Down Tr (symbol: DOY) since the limit was reached in DCR.

To be clear here, I think the best trade of the all times is playing out right now and that is for the biggest bust ever in oil. The reality is that the global economy is in a death plunge to the ground and that means the demand for oil is going to hell in a hand basket. That’s true not just for the US and Europe but also for Asia, India, everywhere. Of course, it won’t be a straight down ride — not by a long shot — but in my opinion it will happen.

Of course, I could be wrong but I don’t think I am. In my opinion, this could be the greatest trade of your lifetime.

I want to give you a strategy to increase your potential profits and of course this will increase your potential losses, too, if I do turn out to be wrong. But the beauty of the EFT strategy we are giving you here is that you can do this with a great deal of control so your total dollar commitment is always manageable. Here is my trading strategy. As the market drops and your confidence in this trade increases, use the coming rally backs to increase your positions or the number of shares you own. Now do this judicially with a constant eye to your total dollars committed to this oil trade. The ideal is to use the coming rally backs to increase you future profits. I think we will hit serious resistance in the $100 to $115 area basis cash oil. Once we breach that mark, the market should slide with little trouble to the $80 area. To penetrate the $80 dollar a barrel level, we need some solid news like Iran coming to a negotiation on the nuclear issue. And I feel that is coming.

I really want you to understand that Iran and Nigerian and all that hoopla are the side shows. The real issue here is the fact that there is global and massive destruction in the demand for oil going on coupled with an unrepresented amount of new oil and new refineries coming on stream for the next 3 years. This is the 2000-pound gorilla in the market. I want you unequivocally to understand that I am seeing major players who were long on commodities now for the first time in years quietly and carefully heading for the exit doors. That means as usual the stupid money will be left holding the bag. At some point, there will be panic selling and a hair-on-fire stampede out of oil. That is the event I want to prepare you for because it has the potential, at least, it could make you very rich very quickly.

Now we have for you a strategy where you can take the ETF tools you are now using and expand the 2 to 1 leverage by using an option strategy… by buying puts on the inverse leveraged ETF we recommended to you. CAUTION: If you are not an experienced options trader, DON’T DO IT! Some of the big boys monitor option strategies and use their billion or two of spare change lying around to manipulate the option prices with a view to the strike prices and expiration dates.

For those of you that are experienced using other instruments to get at oil, be free to do so just be warned there will be rally backs of 10 to 15 bucks or more. Any strategy you envision must take into consideration the dreaded rally backs. The beauty of the simple buy and hold inverse ETFs I have given you is that you don’t care about temporarily price fluctuations because you can’t get a margin call. That means you can sit there and wait them out, safe and secure in the knowledge that your risk is solely the money you put into the market.

In closing here, oil is in play and finally I sense a significant sea change in this market. Even the producers realize that they have pushed things too far and that a significant drop in the price of oil is at hand, rally backs and all. I am hearing that some Mideast interests are figuring on an average price of oil in the coming year of $50 a barrel. My opinion is they will be damn lucky to keep the price that high.

The key here is understanding that the spreading global depression will slash demand unlike anything you have ever seen. All I can tell you is this: I could be right or I could be wrong so you take your chances and roll the dice and hope for the best. But I am convinced that now is the time — and that oil, with the usual scary rally backs, is headed back to $10 a barrel (where it was in 1998).

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