WHY USO?

This is just as good a post for market concepts as it is for understanding the position.

First a USO Call position was closed this morning for something like a 17% gain, it's not anything I'd write home about, but if the same trade were taken just using USO long with no leverage it would have netted about 1.2%. Last week I said we'd be using more hit and run tactics for the simple reason of rising volatility. This doesn't just mean rising volatility in the form of a 1.5% gain from Friday's close to the SPY's intraday high or even the +.60% close today with a big gap up. It means the the increased ATR like the Dow's nearly 2% ATR last week, it means the SPY high to low in one day moving 3%, the increased volume, it means going from "A" to "B" below.

From very low ATR, low gain, but steady movement to very high ATR, no trend and very unpredictable "looking" movement-although I'd say we've done a darn good job in navigating this mess just judging by positions opened Thursday and Friday of last week and closed today.

This is why our tactics for short term trades are leveraged and "Hit and Run". Maybe we will see higher prices in USO tomorrow (I'm hoping), but holding the USO calls that were sold this morning would have meant that the gain of 17% today would likely be worth even less tomorrow even if USO was higher as options have a pricing model that takes volatility, time decay, premium, etc in to consideration, it's nothing like buying the stock and if it is higher, the gains are higher. It's better in this market to take the gain and reset the position if you feel its worthwhile.

This is why I opened USO calls last Thursday...

 I rolled the chart back to 4 p.m. last Thursday, note the leading positive divergence on the 23rd, this worked out well for us as it fired and this divergence alone may have some more gas in the tank as it was at least a 5 min divergence (5 min being typically the fastest timeframe I believe we see institutional activity on with some caveats).

However, I'm about as bearish on USO as any other asset out there, at least for the next several weeks to months. So why take a long position on an asset I'm bearish? Because there was a good trading signal in place, USO was going to move, nothing drops or rises in a straight line, there are jiggles and we just so happen to find a signal for a nice jiggle. However, as mentioned before, this trade would not have been worth putting money , at risk, in the market (as your money is always at risk when its in the market) without a higher profit potential.

I have very high standards for options trades, they not only have to have solid signals, they need to give a set up that gives us as much advantage as possible. The difference between that and say an equity long, the Equity long still has to give the same excellent signal, but it doesn't need the same momentum criteria for getting a lower premium on the entry as USO stock costs whatever the ask is, USO options (all options) change according to time and volatility.

the Bearish Case for USO...  Honestly, the trade I really want is a USO short equity position, short equity rather than buying puts because I want to be able to ride the trend without trading in and out multiple times a day. There are advantages an equity short has that say a Bear oil ETF  doesn't (and vice-versa).

I want to set up a nice core position, full size (about 3x larger than most speculative positions).

 An hourly chart is a STRONG signal, this can easily foretell primary trends so it's no joke.

The signals here show a worsening USO position as the recent highs since mid-May have seen a deep leading negative divergence, in fact 3C is at a new low on the chart and it is lower than any reading as far back as I can see which is the entire year of 2013, that's bad.

I show the divergences with arrows or boxes for leading divergences, the small boxes are where the actual accumulation and distribution occurred. That's a pretty persuasive case on its own.

 The 30 min chart shows the same things, but with more detail, the same leading negative divergence, the same areas smart money has accumulated the lows to send USO higher so they can sell or short in to price strength. You'll see a better example of this in a minute.

 However, short term charts like this 3 min above show a pretty decent accumulation area from last week, I think it has more gas in the tank, even though the trend today was to sell USO in to price strength.

This 1 min intraday chart of USO shows how smart money buys at the lows and distributes at the highs, the first divergence on the opening was a deep leading negative that was sure to stop USO right then and there and send it lower where it was accumulated at "B", it moved up from the demand and was sent back down at "C" with distribution and so on and so forth. Often this is a way to accumulate a position at a stable price and at the best prices intraday, by keeping it in a range. Toward the end of the day they weren't selling to get out of USO in front of tomorrow, but in fact buying with more strength than the rest of the day, they're in a hurry at the end of day to buy, but understand this is a 1 min chart, the buying is exceptionally weak, it's enough to move USO in the a.m. or for several hours, but it's in no way a change of character to a more bullish stance, this is all about positioning not the position.

If the divergence is strong enough it migrates to the next longest timeframe which is 2 mins., here there's 1 early positive that doesn't show up here, it wasn't strong enough to register here, but the other 3 do and again the end of day (EOD) is seeing the strongest divergence of the day.

No matter what happens to crude futures overnight, this small accumulated position is in place and that's why these divergences, even ones like Friday's that we held over a 3-day weekend, hold up.

The ending trade in USO is what got me off the fence and why it was late day.