Option Investor

Double Cold, Double Good

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Hold on to your sled boys and girls. The cold front that started in the Midwest early in the week ended with a bang in the Northeast and dumped snow and cold over much of the nation. Following on its heels is another large front heading south over Montana and scheduled to blanket the Rockies and the Midwest with snow before moving toward the Northeast in a repeat of this weeks weather.

For investors in gas stocks this should be the perfect storm to provide a one-two punch to supplies and accelerate the draw down of supplies in storage. The January natural gas contract has resisted firmly the attempt by sellers to move it below $11.50. With the first draw down in supplies last week since the hurricane volatility it appears the winter trend is about to begin. Shorts hoping for a warmer winter and a sharp drop should that $11.50 level break are probably grabbing for a warm security blanket this weekend. It could get rocky in the days ahead and $13 is the next resistance level.

Oil continues to hover just under resistance at $59 and appears waiting for gas to explode before moving higher. Over the summer gas rose in association with oil and now it is oils turn ride the coattails of gas.

While all of this could be wishful thinking we have seen energy stocks inch up over the last week and some are nearing breakout levels again. While the talking heads on TV fixate on the minute by minute gyrations of crude many of the energy stocks are in a stealth rally.

We did not lose any positions this week and saw gains across the board. Those gains came in the form of reduced losses on several positions after three months of energy declines had put us under water on most. Our time is coming and I am hoping for 2-3 weeks of gains before we lighten the load in January.

We did have a new play triggered from the skinny watch list and that gave us something to do while we wait for colder weather.

I mentioned in the Option Investor commentary that Thanksgiving 2005 was the target date for Peak Oil by Kenneth Deffeyes. He used the same methodology as Hubbert did in correctly predicting in 1956 the peak in U.S. production in 1970. Of the various peak oil commentators I follow the general consensus is still fall of 2007 for the beginning if the irreversible decline. We should have considerable volatility before that date as pressures at the top squeeze demand and delay the eventual decline. As sure as night follows day the decline is coming only the hour is yet unknown.

As energy investors we should see a minimum of four more price cycles before fall of 2007. Maybe as much as six. It will be our responsibility to buy the dips on each cycle as each low should be higher than the last. This is the perfect time to be pondering the future and positioning ourselves for maximum profits.

As we exit our current positions in January I am going to begin adding in some alternative energy plays such as solar and atomic energy. The next few weeks could be boring but the next few years could easily double and triple your portfolio even if we miss a few along the way. Be patient and prosper.

Natural Gas Chart - Daily

Crude Oil futures Chart - Daily

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