The United States Oil Fund seeks the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in the price of a specified short-term futures contract on light, sweet crude oil called the “Benchmark Oil Futures Contract,” less USO’s expenses. USO seeks to achieve its investment objective by investing primarily in futures contracts for light, sweet crude oil, other types of crude oil, diesel-heating oil, gasoline, natural gas, and other petroleum-based fuels.
Take a look at the 1-year chart of United States Oil Fund (NYSE: USO) below with my added notations:
USO has been trending higher for most of the past year. Recently, the stock created a 52-week high resistance level at $13.25 (green), while also climbing a trendline of support (blue). At some point, the USO had to break either the $13.25 resistance or the trendline, and earlier this week the resistance broke.
The Tale of the Tape: USO has broken above resistance. A long trade could be made on a pullback down to the $13.25 level, with a stop placed below that level. A break back below $13.25, combined with a break of the trendline, most likely means lower prices for USO.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT