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Don't Buy the Top

I know it is tempting to add new positions with the oil sector sprinting higher on a daily basis. However, most stocks are either nearing their historic highs or significant resistance ranges. The easy money is always the first breakout and that has passed. There is too much risk in the sector from the gas bubble and rising oil inventories to add new positions. It could take several days or several weeks for the bubble to burst but without hurricanes through the gulf oil fields it will burst.

I considered puts on gas producers UPL, CHK or ECA in anticipation of the bubble bursting but the timing is not quite right. All are at resistance but challenges exist. UPL and ECA are moving higher on new wells, acreage, agreements, etc. It is not just about current gas prices but future potential and they definitely have potential. Encana is just below a nine-month resistance high and would make a good target but it is getting ready to release data on a new field in Nova Scotia and the numbers could be strong. Earnings are July 25th.

UPL is bumping resistance at $60 at what looks like a very nice entry but they just announced new production coming online. They also announced an increase in acreage in Pennsylvania from 27,000 acres to 246,000 acres under lease. Production at an exploration well in the acreage has stabilized at 3 mcfpd. UPL is also a potential acquisition target.

Aggressive traders might want to target UPL or ECA for puts but I am not ready to pull the trigger. We have waited too long for a bull run to return in energy and it may have a couple weeks left before it tires.

We are going on a summer position diet with a target of 7-8 positions total before late July in anticipation of a late August price dip in oil. If we get some hurricane activity it should push prices higher for one last rally before the demand drop in August. That will be buying time again for energy.

Jim Brown

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