Striking Oil

It’s hard to go a day without hearing or reading about the recent collapse in oil prices. And why wouldn’t we? The 60% drop in price over the past nine months is one of the greatest in history. In fact, the entire commodities complex has been hit hard during this time. But really, it should come as no surprise to investors that these price declines have taken place while the U.S. dollar has rapidly increased in value during this timeframe. Make sense, doesn’t it? Those items priced in U.S. dollars will decrease in price as the value of the U.S. dollar increases.

$USD and $CRB US Dollar and Commodities

(Source: charliebilello.tumblr.com)

Everything from agricultural and soft commodities to industrial and precious metals have suffered significant price declines as the dollar has rocketed upward. Even though this price correction should not be a surprise, investors have become exceedingly pessimistic towards commodities. Such pessimism in the commodities space has not been this strong since the 2008-2009 financial collapse.

$CRB Sentiment

(Source: Shortsideoflong and SentimenTrader)

With such negativity prevalent in this space, we sit up, take notice, and look for opportunities. We think we’ve identified a well defined opportunity in oil, the focus of today’s article. Our oil investment tool of choice is USO, the United States Oil Fund – an ETF that tracks light, sweet crude oil. Looking at the two year chart of oil’s daily price below, we can see its impressive decline. And, we can see that it has developed a nice divergence between price and momentum (as measured by Wilder’s RSI).

$USO Daily Two Year

Zooming in, we can see the divergence up close and note the potential for a false breakdown if 16.75 is reclaimed. With the amount of investors shorting oil, the aforementioned set-up is ripe for a sharp reversal. If 16.75 can be reclaimed and the downward green trendline broken, price could move rapidly upward towards February’s highs (+19%) and even a 38.2% retracement of this epic collapse, which would be a 45% gain from these levels.

$USO Six Month

We like USO above 16.75. There is no reason to own it below that level, which lines up with the January lows. Our risk is defined. We don’t care if we own it above 16.75 and quickly turns back down and we get stopped out. Getting stopped out means we did something right – proper risk management. And if it doesn’t breakout above 16.75, no worries. We’ll wait some more. With this opportunity, our risk is well defined and the reward is heavily skewed in our favor. We’ll own it above 16.75. Below that, we’re not interested.


Disclosure: the author will consider a long position in USO based on the criteria provided in the article.

Disclaimer: nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions.