July 28, 2017

Could Not Resist the Oversold State of USO

The United States Oil Fund (USO) currently sits in a short-term ‘very oversold” position. I was able to take advantage of the oversold extreme at the open as the underlying USO spiked higher at the open and afforded me a wonderful opportunity to take some profits (reported in an earlier post). At the end of the day USO had once again made new lows, so I am once again attempting to take advantage of the high-probability trade by buying a few more calls. Here is the trade placed in my Thinkorswim account:

There are quite a few short-term technical indicators that are screaming for a bounce to occur, so I am not going to fight Mr. Probability. I still think we could trade in a 1110-1180 range for quite some time. A break and hold below 1110 and that could spell lots of trouble for the bulls, but that is a more of an issue over the intermediate-term time frame. Over the short-term I think a retest of the lows could occur tomorrow followed by a sharp spike in the indices as we approach options expiration.

Another respected blog that I follow also has a similar sentiment to mine regarding the oversold extreme in oil and very notable statistics about the historical performance after such an extreme oversold reading.

Currently, the RSI (2) of USO reads 1.15, which is a reading that in most cases leads to a short-term bounce. Of course, USO was back in January and the indice spiked for a day only to turn right over and collapse. However, this time is different for a few reasons, but the main one is that the longer RSI (14) has moved into historical realms as well. When both of these indicators line up like this the probability of a bounce increases significantly.

Furthermore, the S&P 500 has dipped into a short-term oversold state which is another encouraging sign for the short-term bull.

Have a wonderful night and try not to read too much before tomorrow open.