For those of you who are in the USO OIL trade we should be long 50 shares OIL @ 52.16 and short 25 shares of USO @ 70.23 and 25 shares @ 68.74. Take a look at the 1 year charts in the daily time frame (Link 1, Link 2). Notice that their shapes are identical only they differ only by scale. The UDO closed @ 70.70 while OIL closed @52.16. That’s because they are each an ETF tied to the price of oil. Now compare the volumes and you’ll that the USO trades roughly 2.5 million average daily shares while OIL trades at 0.025 million. That lower volume on the OIL explains means that it’s ill liquid, something no trader likes. But what really concerns me about OIL is that it’s owned by Barclay’s. More on that below. Now concentrate on USO the 1 year daily. What I notice is how it’s at support at 70 with the stochastic under 20 and turning up, highly bullish. So why did I short it? To see why look at it in the weekly time frame. There the stochastic has rolled over and is going down. If you focus on the last two price bars representing the last two weeks it shows that 2 weeks ago USO closed higher than it opened where as last week it closed lower than it opened a change in trend.(Link 3).
Go back to the daily and see how there is nothing even vaguely resembling support until about the 60s level. So if USO it breaks 70 it will fall a long ways. Will it? Can’t say. But here’s what I see. That stochastic in the daily will most likely rise all week long and by the end of the week be at or near the top rolling over. When the FED meets the stochastic in the daily chart will line up with the stochastic in the weekly. That’s when we could get our break of support. In the mean time instead of just getting stopped out of our short I would rather get some profit on the long side if it’s there.
One word of warning. If you get into this trade tomorrow you may consider the reverse trade instead. By that I mean long USO and short OIL. That’s because OIL is owned by Barclay’s which may or maybe not insolvent. They will implode someday soon, but hopefully not tomorrow. But when they do I would rather be short em than long em.
Link 1: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=uso&sid=0&o_symb=uso
Link2: http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=oil&sid=0&o_symb=oil
Link 3: http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=uso&time=8&freq=1
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4 comments:
How do you identify support in the daily?
"If you get into this trade tomorrow you may consider the reverse trade instead" : if the reverse trade is advisable tomorrow, are you planning to post and elaborate about it?
First off support is a price level which the security trades down to, but not below. Some people can call support to the penny, but I'm not so smart, to me it's a range or band although a very narrow one at that.
So let's take a look at USO (Link 1) Do you see how it broke above 70.00 about 3/4 of the way into October,went all the way to 77.59-when oil hit 99/barrel-. It came back down to 70.00 again in mid Nov., but turned back up. That's support. I call that one touch support. The more touches of support without a break the stronger that support is. From 70 it went back up to 77.59 and now we have has come back to just under 70.000, 69.40. So if 70.00 is really support then we have broken it. But it seems to me that the price band of 69.00-70.00 is supporting USO.I want to know if it is going to bounce powerfully off support and go on to make new highs or break support. So far it's just hovering around support, not a good indication of the former.
Link 1:http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=uso&time=8&freq=1
The reverse trade is to go long on the USO and short OIL. The reason is that I realized after I posted the original trade that OIL is owned by BARCLAY'S. I am afraid that they are insolvent. If they fold overnight the shares of OIL that I am holding long or short will be worthless. That means that I can't sell them if I hold them long, but if I'm short I can buy them back for nothing or close to nothing. For the purpose of these posts I don't want to change a bunch of positions all around that might be confusing. I just want to keep the trade going to illustrate the hedging technique.
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