Saturday, January 3, 2015

Time to Buy Oil or Speculate on Call Options

Click on Chart to Enlarge

The chart above is USO which is an ETF that tracks crude oil prices.  Obviously anybody at this point is aware that oil has fallen substantially.  That fact in and of itself is reason to consider buying oil or putting it on a speculative watchlist.

And when I say that "anybody" is aware of crude's decline at this point, I can say from experience in recent years of market cycles, that there are certain social "tells" that are pretty raw psychological indication that a trend is near its end.  Dependent upon your social circles, and how much you much interact with "the public" etc, you may be able to get significant information from just making note of ANY comment on a particular market by "the public".  Recently, within the last 3 weeks, I have heard people comment how low gas prices are - people that I have never heard mention prices of anything in any other conversation.  Market prices are not even on their radar. 

So if you think about the herd psychology and obviousness of the trend which must be occurring for their brain to now verbally note this in a group of others, where the potential for criticism or confrontation of significance exists, it seems to me that this is a very REAL and astute indication of the end of a trend, when the "dumb money" is compelled to note it.

So this is the current backdrop in which we find oil/energy prices.

Now we currently have other technical indications that the trend is ending. 

There is triple time frame stochastics bullish divergence (weekly, daily, hourly) at the current low.

There is daily time frame MACD divergence at the current low.

The recent consolidation on the last couple weeks formed a triangle, which typically is a pentultimate price pattern, meaning it occurs just prior to the last move of a trend.

There is now substantial Money Flow Index bullish divergence (which takes volume into consideration) and the trend in money flow appears to be turning up.

So moving to the chart above, there has been a moving average crossover of the money flow index after an extreme oversold reading with bullish divergence.

AT A BARE MINIMUM if you are short oil or energy at this point, I suggest you cover the position.

If you are an options speculator, I would suggest $19 or $20 strike calls with a few months until expiration.  A very simple, and in my estimation a well in excess of 50% probability of winning trade, would be to buy an April 20 strike call on USO and to put in a limit order to sell it at 100% gain.  Let it expire worthless if the order is not filled, or exit at expiration with the value in the option if the 100% gain is not hit in the meantime.

Another similar play would be to buy the October 20 strike call and to hold for a 100% gain with the same exit contingencies just noted in the previous idea.

If you make a trade on this and want follow up analysis or help with fine tuning the exit, then comment here or email reply to me and I will follow up on this with you.


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