United States Oil Fund (
appeared on my bearish scan on Tuesday evening, but it wasn't the
stock or ETF that stood out the most that evening, so I opted to
write about Potash (POT) instead. However, I kept USO's
appearance on the bearish list in the back of my mind and I also
took note that ConocoPhillips (
were on the bearish list Tuesday evening. When I ran the scans
last night, Chevron (
) and Marathon Oil (
) both made the bearish list.
This led me to go back and look at the daily and weekly charts
of the United States Oil Fund. Two things stood out on the daily
chart: the fact that the fund is hovering right at its 50-day
moving average and that the fund just moved out of overbought
Looking at the weekly chart, I was able to create a trendline
by connecting the highs from the past three years and that
trendline is just overhead at the $38 level. However, there is
also a trendline down at the $33 level that connects the lows
from the past 20 months. These two trendlines are compressing the
price of the fund and when a stock is being compressed, it tends
to explode in one direction or the other.
Normally I would recommend playing a straddle with 35 strike
options, but there is something beyond the charts that makes me
think USO will fall before it rises and that is the sentiment
toward the fund and toward
oil in general
There are a number of sentiment indicators you can look at for
individual stocks. My favorites happen to be the short interest
ratio, analyst ratings and the put/call ratio. When you have a
fund like USO, you only have two of these three indicators at
your disposal. The short interest ratio for USO is 4.4, which is
not too high and not too low. The put/call ratio is at 1.14 and
that is lower than 74% of the readings for the past year. Between
these two indicators the sentiment has a slight bullish skew
(meaning a contrarian views this as bearish.
The biggest bullish sentiment comes from the oil futures. Each
week the Commodity Futures Trading Commission publishes the
Commitment of Traders report for each commodity and futures
product on the market. The reports are broken down into three
categories: large speculators, small speculators and commercial
hedgers. For each category, the report shows a net position for
the group. For instance, if the large speculator group has
100,000 contracts held long and 50,000 held short, the net long
position is 50,000 contracts.
This past week's COT report showed that large speculators are
net long 391,174 contracts. To put this into perspective, the
group had NEVER been long more than 400,000 contracts until
February of this year. Even with
falling for the better part of the last five weeks, large
speculators are still holding a huge long position. With such a
large position long, it could take a while to unload these
positions and it will create significant selling pressure on oil.
Because the United States Oil Fund is a direct reflection of
, the selling pressure will extend to the fund as well.
I look for the USO to fall to the $33 level at the very least
and if that trendline gives way the next support level is $31 and
then down to $29. Shorting the fund is the easiest way to play it
and you can stagger your exit with each of these support levels.
If you are an options trader and want to play a straddle, I would
recommend options that are a few months out as it could take time
to play out.
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