The answer to last week’s timing quiz was… WRONG! Despite my belief that the long-term fundamentals on coal are sound, my timing clearly was not. That sound you hear in the background, is me eating crow.

Last week’s sell off amongst coal producers was the result of a downtick in the European spot price for coal. In fairness, it is hard to predict changes to the spot price of anything.

However, I missed a couple of other things: 1) technically, the stocks were exhibiting a topping pattern, which some technicians define as a blow off, and 2) I thought that the price for coal was playing catch up to oil, rather than perhaps, leading the trend. It may be the coal spot price is telling us to that oil prices may follow suit.

Based on last week’s pattern, one could argue that coal producing companies tend to track the price of coal. Which means that coal producers are more of a coincident indicator than a leading indicator.

Oil and natural gas stocks, on the other hand, tend to be a leading indicator of where oil prices are going. At the very least, traders are not willing to price Canadian energy companies based on current prices for oil. Indicative of that is the recent weakness in resource stocks like Suncor (TSX: SU), Canadian Natural Resources (TSX: CNQ), and EnCana (TSX: ECA).

If the recent performance among the Canadian energy triad is symptomatic of a peak in oil prices, then technically, US$150 per barrel oil may be the same blow off technical pattern that I missed seeing in the coal sector.

If you buy that scenario, then look at buying Horizon BetaPro NYMEX Crude Oil Bear Plus ETF (TSX: HOD, recent price $6.73). HOD seeks to produce percentage returns that are 200% inversely correlated to the price of oil. Bottom line, a 5% decline in the price of oil should approximate a 10% increase in the value of HOD. The price of oil being defined as the price of NYMEX light sweet crude oil futures contract for the next delivery month.

As for last week’s discussion around Fording Trust, the August 96 calls are showing a bid price of $0.00 and an offer price of $4.95. Since that spread is wide enough to drive a truck through, I assume the market makers will transact at some price between those two extremes. My best guess would be somewhere between $1.00 to $1.50.

If you bought the US options (i.e. FDG August 95 calls), they closed at a bid of US $1.95 offered at US $2.40. You probably should take your lumps, recognizing that at least the losses were limited to the premium paid.

If you sold the Fording October 94 puts on the Mx, or the September 90 puts in the US, and are willing to take the shares, I would consider doing so. In fact, that is what I will be doing with the Fording puts I sold last week. My reasoning is that I believe the distributions are likely to remain at a decent level – that goes back to the fundamentals I talked about last week - and FDG options continue to trade at high implied volatilities. The latter point allows me to write covered calls on the newly acquired stock, which I will do immediately following the assignment of my short Fording puts. For the record, because there was such a wide spread on the Canadian options, I decided to write US puts on Fording.

Finally, so as to end on a positive note, at least one analyst thinks that last week’s sell off was overdone. According to the Associated Press, Citi Investment Research analyst John H. Hill boosted his rating on some US coal producers to “Buy” from “Hold,” citing a better outlook for the coal sector.

In his view, the recent sell-off in the coal producers was “excessive.” Hill writes, “This seems profit-taking amid a deteriorating economy, and the end of the beginning, not the beginning of the end.”