Oil Headed To New Highs On Another Round of Dollar Selling

Oil has now completed a 50% retracement of its move from the $110 breakout level to the recent high of $135. After testing the $122.50 retracement level we saw an explosive +$5 move up in crude today on the heels of another round of dollar selling pushing the Euro back above $1.56. This move was triggered after ECB president Jean Claude-Trichet stated that the European Central Bank was prepared to raise interest rates next month which would again put new pressure on the dollar as higher interest rates overseas tend to push up demand for euros as global investor seek to lock in higher rates.

Furthermore, looking at the chart of the FXE which tracks the EUR/USD we can see that there is a near perfect double bottom at the $1.54 level, and today seems to be the beginning of the next leg up which we firmly believe will take the Euro back to the $1.60 level thereby pushing crude back to new highs above the $135 level. Moreover, note the strength in MXC PDO and FPP on the charts, as crude oils +$10 move off its highs only brought new buyers in creating nice consolidation patterns in all 3. All 3 are trading above their 10 day EMAs and we view this as a sign of strong accumulation here at these levels, and we expect short squeezes to commence in the very near future as shorts have now found themselves trapped in these low float energy stocks.

Another round of momentum brought on by new highs in crude oil have potential to push all 3 above their recent 52 week highs. As such we have taken positions in both PDO and FPP at $18.60-18.70 and $5.02-5.07 respectively. While we would have liked to play MXC as well, the liquidity is a bit too light for our liking.

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