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Betting On An Oil Rebound

07/25/08 01:54:13 PM
by James Kupfer

With the recent drop in oil prices, is USO a good short-term buy?

Security:   USO
Position:   Buy

For traders with a short-term focus, it looks like USO might be in position for a quick, albeit small tradable rebound. Granted, there is good cause to think that oil has made a long-term top, so don't expect any long positions to soar to new heights. That being said, here is why the chart seems to support a potential rebound.

FIGURE 1: USO, DAILY. Looking at the stock over a few months, it appears to be on an uptrend.
Graphic provided by: Wealth-Lab.
Looking at USO (Figure 1) over the last few months, you can see that it is in an obvious uptrend, just in case you couldn't tell from what it costs to fill up your car. Drawing a linear regression channel around the price action starting in August 2007, you can see that on multiple occasions, USO has bumped against the upper boundary of the channel. Now USO is at the lower boundary, which can be seen better in Figure 2.

FIGURE 2: USO, DAILY. Two things to note. First, USO is very close to hitting the lower linear regression channel (blue dotted line), and second, USO is at the significant Fibonacci retracement level of 38%.
Graphic provided by: Wealth-Lab.
Figure 2 is a close-up view of the same USO chart. There are a couple of thing worthy of note. First, as noted previously, USO is very close to hitting the lower linear regression channel (blue dotted line). Second, USO is at the significant Fibonacci retracement level of 38%. I calculated this using the bottom of the move beginning in 2008 until the most recent top. Finally, USO is near a support level (green line) formed in June of this year.

When multiple support levels converge, it lends credence to a potential bottoming, at least on a short-term basis. On Friday, I entered a long position of USO at $100. I have set a stop below the June lows. Again, this is a short-term trade, given that I think USO has made a long-term top, but the bounce, assuming it happens, will hopefully be good to at least about $107.

James Kupfer

Mr. Kupfer is a market professional and amateur stock market commentator. Disclosure: It is likely that Mr. Kupfer has or will enter a position in any security he writes about.

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Date: 07/29/08Rank: 1Comment: 

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