My Favorite Post-Memorial
Day Trade
By Jeff Clark
May 24, 2007

There's stupid. There's moronic. And then, there's Congress.

Congress just passed legislation that outlaws gasoline price gouging. Let's ignore, for a moment, the rather inconvenient truth that federal and state governments actually make more on a gallon of gas than does Big Oil. And let's focus solely on Congress' habit of closing the barn door after the horse is long gone.

Gas prices are up – way up. And this new legislation is meant to create the appearance that Congress is actually trying to do something to relieve consumers' burden at the gas pumps. I'm not so sure that'll happen. But there is one thing I am quite certain of…

Congress is a terrific contrary indicator.

By the time the folks in Washington D.C. get around to focusing their attention on anything other than their own re-election efforts, odds are the topic has peaked and market forces are already taking care of the issue.

So it's no surprise that wholesale gasoline prices right now – just as Congress rushes into action – are at the same level at which they peaked in each of the past two years. Just take a look at this chart…

In 2005, wholesale unleaded gasoline prices peaked at $2.42 per gallon, just ahead of a brutal hurricane season. We saw the same thing in 2006 as the media inflamed fears of Katrina II.

Whatever the reason for this year's rise, I think it's a pretty good bet we're seeing the makings of a top as we head into Memorial Day weekend. And that means that come next Tuesday, it'll be time to short the oil sector.

I was bullish on oil stocks earlier in the year. I turned cautious a few weeks ago and recommended taking profits in the sector. Now I'm outright bearish.

Newspaper headlines are screaming about gasoline prices. CNBC's talking heads are constantly chatting about it. The ladies on The View are arguing about it. And now Congress is doing something about it.

Seems to me like conditions are set for a top.

Then, of course, there's this chart of the oil-service ETF…

This is a terrific illustration of a bearish rising-wedge pattern. Most of the time, this pattern breaks to the downside and erases much of the previous gains. If that happens this time, then the oil sector is going to take quite a fall.

One way to profit on the decline is to buy shares of the ProShares UltraShort Oil & Gas ETF (DUG). This exchange-traded fund returns 200% of the inverse performance of the oil and gas index. So if the index falls 10%, then DUG rallies 20%.

Another way to profit is to buy put options on individual stocks in the oil sector. A 10% drop in the price of a stock can create gains of 50%-100% in put options. I'll be sharing a couple specific ideas with S&A Short Report subscribers next Tuesday afternoon.

In the meantime, don't worry too much about the pain at the pump. After all, Congress is on the job.

Have a wonderful Memorial Day weekend. And, if you're so inclined, raise a glass and toast to the men and women who made the ultimate sacrifice for this great nation.

Best regards and good trading,

Jeff Clark