While spectators have been oohing and aahing over the fireworks in gold and silver, oil prices have been quietly receding. Yesterday the selling pressure reached a fever pitch, driving the ever-popular United States Oil Fund LP ETF (NYSEARCA:USO) down 5% on notable volume.
With the oil recovery approaching its five-month mark, the steam appears to be dissipating. Indeed, more than a few worrisome signals have materialized for USO in recent days in.
Let’s take them one at a time.
First and foremost, we have considerable deterioration in the price trend. The oil ETF now sports two (count ’em two!), lower pivot highs and lower pivot lows. This is the first such daily downtrend we’ve seen since the February bottom.
Second, USO has slipped below its 50-day moving average and the 20-day MA is now pointing lower. A wee bit more weakness out of black gold, and the 50-day will turn lower as well.
Click to Enlarge
Third, I count no less than six distribution days cropping up over the past few weeks. These high volume down days had all but dried up during the April/May oil surge. Continued selling pressure will weigh on USO in the weeks ahead.
If you think oil keeps slip sliding away, this trade is sure to entertain.
The USO Oil Trade
Buy the Sep $11.50 put for 95 cents or better. The low implied volatility in USO is making option purchases mighty cheap these days. Currently the implied volatility rank sits at a lowly 10% suggesting option prices are nearing their lowest levels of the year for the oil ETF.
As with all put purchases, the risk is limited to the initial 95 cent debit and will be forfeited if USO sits above $11.50 at expiration.
The reward is limited only by USO falling to zero, so consider your profits unfettered should oil really bite the dust in the days ahead.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
