Bullish Oil Play But Not Yet

As I told Cycle 9 Alert subscribers yesterday… it’s extremely tempting to buy oil now that prices have dropped so sharply.

But don’t do it! Not just yet at least… just hear me out.

The United States Oil Fund LP ETF (NYSE: USO) is down a whopping 26% since mid-June. It’s trading at its lowest price since May 2009 and is deeply oversold.

Contrarians the world over must be thinking: “How much worse could it get for oil?” While they itch to buy.

Indeed, whenever oil prices find their footing we can expect to see a fairly sharp bounce higher.

But I think it’s still a bit too early to try catching this falling knife. Here’s my reasoning:

• Oil hit oversold levels (like we’re seeing now) in October 2008… but prices continued to fall for another 20 weeks, not finding their footing until March 2009.
• USO had a support level at $30 but this was strongly broken this week… so the ETF could fall as low as $23 — the 2009 low — before finding eager buyers.
• Seasonality will continue to be a headwind for oil prices through January or February.

From a seasonal standpoint, bullish oil positions (i.e. long USO) are best when added in January, February, March and April.

So, as tempting as it is to recommend stepping in now to buy oil’s fat discount… I think you’re wiser to wait a few months. Historically, oil prices have a tendency to slide lower during November through January. And this year, oil’s sharp sell-off has the look of a “falling knife” that could be costly for anyone trying to catch it.

What’s more, while the United States Oil Fund LP ETF (NYSE: USO), which tracks the price of WTI Crude Oil, is already down 26% in less than five months, a quick comparison of its price to the price of Brent Crude Oil (NYSE: BNO) shows USO has room to fall even lower through year-end.

Here’s a ratio chart plotting the price of WTI Crude (USO) versus the price of Brent Crude (BNO). As you can see, the ratio is in a long-term downtrend and has recently turned lower after hitting a wall of resistance (red line).

Oil Prices Still A Falling Knife

See larger image

I fully expect to get Cycle 9 Alert subscribers into a bullish oil play at bargain-basement prices. But not until the time is right!

Learn more about my seasonality research and how it helped subscribers secure a 73% gain during the energy sector’s “sweet spot” season here.

Adam-ODell2

 

 

 

 

Adam

The World’s “Safest” Investment is About to CRASH

The one investment you may hold dear to your heart… the one investment that helps you sleep better at night, that you rely on for safety, security, and maybe even profits in a world gone mad… is about to get slaughtered.

When it happens, trillions in wealth will be wiped out virtually overnight!

To find out exactly what this investment is, click here.

Click to Learn More
Categories: Commodities

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.