Profit-taking is striking oil and energy stocks across the board today. The United States Oil Fund LP (ETF) (USO) is off just shy of 3%, notching its largest down day in a month.
The selling sortie shouldn’t be that surprising given the out-sized gains in energy of late. It was only a matter of time before something spooked oil lovers into taking some chips off the table.
The catalyst came in the form of weaker-than-expected manufacturing data out of China, which has the entire emerging market complex falling hard today. The iShares FTSE/Xinhua China 25 Index (ETF) (FXI) is off 2%, and iShares MSCI Emerging Markets Indx (ETF) (EEM) is no better at -2.5%.
Let’s assess the price action in USO to see just how much damage is being inflicted.
Click to Enlarge
As the accompanying price chart reveals, the USO oil ETF remains firmly in bullish territory. The pullback is thus far run-of-the-mill and has yet to shatter any significant support levels. A retracement to the 20-day moving average (red line in chart) is as normal as it gets leaving little for oil bulls to get worked up about.
Until more serious selling pressure crops up, the current oil dip should be viewed as a buying opportunity and nothing more.
Lending further weight behind a bullish forecast for USO is the momentum confirmation accompanying its last swing high. The new peak in USO at $11.50 was accompanied by a new high being carved out by the Relative Strength Index, which suggests the momentum of oil’s budding uptrend remains strong.
While the current bout of profit-taking may persist for another day or two, traders looking to get in on the long oil trade should be eyeing this action with interest.
Drill for Cash in USO
USO option premiums offer a compelling return for those willing to step up and sell them here. The cheap price tag of USO makes it a prime candidate for naked puts.
Sell the June 10 put for 35 cents. The max reward is limited to the initial 35 cents and will be pocketed if USO sits above $10 at June expiration.
By selling the put you obligate yourself to buy 100 shares of USO at $10 if it sits below that price at expiration. Since you received 35 cents up front your true cost basis would be $9.65 – perhaps not a bad spot to get long shares if you think the oil recovery continues.
As of this writing, Tyler Craig was short calls and puts on USO.
