Oil ETF – USO Chart – May 30, 2008

For the first time in my weekly charting series I’ve decided to chart one of the major Oil ETFs, United States Oil Fund LP (AMEX: USO).  Clearly I should’ve done this earlier and possibly could have made some good trades on it. I think everyone is aware of the rise in oil prices.  The questions that remain are how much is it going to affect our economy and when will it ease. (I’m using “USO” and “oil” interchangeably in this article – Note that the price of oil is not equal to the price of USO, but does mirror the movement and USO is easy to trade for those of us who don’t directly trade commodities.)

The best trend line going that we (those who want oil to fall) can hope for is the line of higher lows.  Eventually all stocks and ETFs return to this line and test support.  USO is still 10% above that line giving the USO bears hope of a decent oil correction.  That line of higher lows is also close to the 50 day moving average which was last tested two months ago.  USO also fell below its 10 day moving average on Wednesday and recovered, but Thursday and Friday it couldn’t recover and we saw confirmation closes below that line.  Bears like closes below the 10 day sma.

The oil bulls could look at the 20 day moving average and see that it has provided support for the past two months and although it broke once at the beginning of May, it snapped back for a quick 15+% gain over the next few weeks.  The same could happen again starting next week.  Until USO has confirmation closes below the 20 day moving average I’d be nervous to short it.  Another less precise trend line I drew could offer support closer to 100.  This line had been the trend line of higher highs and later became the trend line of higher lows.  That line coincides with the short term trend line of higher lows that started at the beginning of April.

In the end, Oil (and USO) are going to be hard to predict for a few more days.  If the 20 day moving average breaks, I’m afraid the last two trend lines I mentioned will provide support.  I’m not trading on USO yet, but if/when it gets back to the lower trend line of higher lows and the 50 day moving average, I’ll be buying calls and maybe selling naked puts to fund those calls.  The reverse goes for the high side.  When USO hits that upper trend line of higher highs again, I’ll plan to buy puts and might (not likely) sell naked calls on it.

This is what USO does:

The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified.