I wrote about the
United States Oil Fund (
back on April 3
, but the fund caught my attention again last night. Earlier this
month I pointed out how the 50-day moving average had been a
pivotal support level and that if it broke that support the USO
could head down to as low as $29. Instead, the 50-day moving
average held as support and now the fund is back up at the $37.50
level which has been resistance two previous times in the last
seven months. I have marked the occasions with the three red
circles. It is also worth noting that the fund is in overbought
territory again, at least on the daily
Turning our attention to the weekly USO chart, we see that the
fund is right at the trendline connecting the highs from the last
three years. This gives the fund two layers of resistance to get
through-the $37.50 level on the daily chart and the downward
sloped trendline on the weekly USO chart which is very close to
the same level.
The other factor in my somewhat bearish stance in the article
from earlier this month was the bullishly skewed sentiment
has risen since the last article, but it is still among the lower
half of the past year's readings. The short interest ratio is
interesting in that it has risen, but it rose due to a drop in
trading volume not an increase in shares sold short.
The short interest ratio measures the number of shares sold
short divided by the average daily trading volume. The
short interest ratio jumped from 4.4 to 7.0, yet the number of
shares sold short dropped from 18.3 million shares to 15.5
million shares in the most recent short interest report. Normally
when a short interest ratio rises, I would view this as a bullish
sign due to contrarian thinking. When it rises due to a drop in
the trading volume, it isn't a bullish sign for me.
The other sentiment indicator I mentioned in the previous
article was the Commitment of Traders report for
. Very little has changed in the last few weeks with the COT
report. The large speculator group is still net long almost
400,000 contracts and the number of contracts held long has
actually increased slightly in the last two weeks, but not by
The bottom line is that the USO faces huge resistance on the
charts and at a time when the sentiment is presenting a mixed to
. I would look to short the USO at this time with a target of $33
and a stop at the $39 level. You're looking at a potential gain
of 12% and the stop would result in a 3.8% loss if hit. These
aren't huge percentages, but if you use the leverage of options,
the potential gains are magnified greatly. As of yesterday's
close, the June 40 put was selling for $3.00. This option would
have an intrinsic value of $6.00 if the fund drops to $34 between
now and June 20 and that would represent a 100% gain.
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