Daily Stock Analysis: USO Chart (United States Oil Fund)

I wrote about the United States Oil Fund (NYSE: USO) back on April 3, but the fund caught my attention again last night. Earlier this month I pointed out how the 50-day moving average had been a pivotal support level and that if it broke that support the USO could head down to as low as $29. Instead, the 50-day moving average held as support and now the fund is back up at the $37.50 level which has been resistance two previous times in the last seven months. I have marked the occasions with the three red circles. It is also worth noting that the fund is in overbought territory again, at least on the daily USO chart.


Turning our attention to the weekly USO chart, we see that the fund is right at the trendline connecting the highs from the last three years. This gives the fund two layers of resistance to get through—the $37.50 level on the daily chart and the downward sloped trendline on the weekly USO chart which is very close to the same level.


The other factor in my somewhat bearish stance in the article from earlier this month was the bullishly skewed sentiment picture. The put/call ratio has risen since the last article, but it is still among the lower half of the past year’s readings. The short interest ratio is interesting in that it has risen, but it rose due to a drop in trading volume not an increase in shares sold short.
The short interest ratio measures the number of shares sold short divided by the average daily trading volume.  The short interest ratio jumped from 4.4 to 7.0, yet the number of shares sold short dropped from 18.3 million shares to 15.5 million shares in the most recent short interest report. Normally when a short interest ratio rises, I would view this as a bullish sign due to contrarian thinking. When it rises due to a drop in the trading volume, it isn’t a bullish sign for me.
The other sentiment indicator I mentioned in the previous article was the Commitment of Traders report for crude oil. Very little has changed in the last few weeks with the COT report. The large speculator group is still net long almost 400,000 contracts and the number of contracts held long has actually increased slightly in the last two weeks, but not by much.
The bottom line is that the USO faces huge resistance on the charts and at a time when the sentiment is presenting a mixed to bullish skew. I would look to short the USO at this time with a target of $33 and a stop at the $39 level. You’re looking at a potential gain of 12% and the stop would result in a 3.8% loss if hit. These aren’t huge percentages, but if you use the leverage of options, the potential gains are magnified greatly. As of yesterday’s close, the June 40 put was selling for $3.00. This option would have an intrinsic value of $6.00 if the fund drops to $34 between now and June 20 and that would represent a 100% gain.

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