Fundamentally, there doesn't seem to be a good reason to get behind lower prices in oil after the last OPEC meeting. Saudi Arabia's promises to increase production are met with increasing skepticism and doubt that they even have the capability. Even if they did, what would keep Iraq and Iran from lowering their output?
The one wildcard may be Russia. Russia has the capability to increase supply, they aren't a part of OPEC, it's just a question as to what their motivations may be.
I've posted many, many times on this pattern in USO.
A big bear flag in USO- a bearish continuation pattern. Today USO broke as ultimately expected, below the consolidation area and did so on increasing volume. The price pattern implied target is around $32-$33. However, oil is one of the most volatile trades out there with fundamental developments that can't be discounted effecting price, for example, Libya and the MENA situation.
Today if you kept a tight stop on USO as advised, you could have pulled about a point out of the UCO trade, but a 5 min negative divergence appeared pretty quickly sending USO much lower. There's the possibility of margin calls on a heavily leveraged commodity sending USO lower on follow through selling.
The trade as I see it, accounting for volatility, would go short USO, especially if there's any strength that stays below the $39 level. A stop can be placed at the white trendline at approx $39.41
The closer you can get to that trendline/stop, the less risk and the more the trade makes sense. If you want to consider entering a short trade now on the possibility of margin induced follow through selling, the stop needs to be tighter for the trade to make sense, I'd say around $38.25.
I think if you like the idea of the trade and keep risk down to 1%-2% of portfolio on the trade, it's certainly worth a crack. As I noted at the top of this post, I've written about this outcome many times and here it is. If you need help figuring out the correct position size, feel free to email me.
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