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Thursday, March 28, 2024

Buy Signal on USO?

Allan sees signs that USO will go higher, whereas one of Stock World Weekly’s trade ideas for this week is an options strategy based on SCO (ProShares UltraShort DJ-UBS Crude Oil) and is essentially betting "oil will not be back over $110 in January."  – Ilene 

Courtesy of AllanTrends

USO

Friday triggered a new Buy Signal on USO, the United States Oil Fund.  Although USO trades like any other stock, it is what is called an “Exchanged Traded Fund” which invests in oil, specifically futures contracts on West Texas Intermediate, light sweet crude oil. As the price of oil rises, so does USO, and vice versa.  Below is a chart of the most recent three signals from USO.  [click on tables and charts to enlarge]

USO

USO

(If you click on the chart it will expand to a larger view.)

The price of oil can be effected by a volatile mix of economic and geopolitical developments, which seems to be the norm these days.  Yet all we care about is that the price of USO has risen above the trend line and a Buy Signal has been generated. The last buy was in late February at 38.31. USO then rose as high as 45.60 (+20%) two months later in late April before reversing with a Sell Signal May 5th @ 41.87.  From there, it dropped as low as 35.14 (+16%) before Friday’s Buy Signal @ 38.87.

While its not the purpose of this trading system to buy at the absolute lows and sell at the absolute highs, the system got the price direction of oil right with each of these past two signals, for a real time profit of at least about 10% both times. That’s two 10% gains in four months, or about 2.5% a month, or about 30% a year. There are also SCO and OCO, which are the leveraged  versions of USO designed to go up or down 2X the percentage of USO.

Not all of these USO signals work.  Some of them break-even and some of them lose money.  But what we have seen with USO is not unlike what we have seen with all commodity based signals, that the winners are much bigger than the losers. In addition, oil is one of those commodities that can move up or down in a hurry and by large margins.

Here is a very long term view of just three USO signals in nine months from late 2008 to mid-2009:

USO_2009

USO_2009

There was the Sell @ $79, followed with a Buy @ $29 and then another Sell @ $36, all within a nine month period. The percentage gains in less than a year on this one commodity, without using any of the leveraged versions,  were 65% and 30%, respectively, for a nine month return of about 95%.  Using the two leveraged funds would have about doubled that.

There is huge potential in trading USO, although there are periods of small gains/losses.  We never know if any particular signal is going to be one of the big winners, or small losses, or somewhere in-between. But we do know that the probabilities are on our side when we take these trades and those probabilities include some big winning trades.  USO always triggers with promising signals, whichever way it choses to go.

SLV

Another trade worth pointing out is in Silver, specifically SLV:

SLV

SLV

Earlier this year, SLV triggered a Buy signal @ $28.74.  A little over two months later it reached a high tick of $48.35  (+68%) before setting down to reverse Short at $42.24.  The correction took SLV as low as $31.97 (+25%) before once again issuing a Buy signal at $36.99 on July 13th.  So far, a 5% profit in the first week of the signal. That could be it, or just the beginning of another huge run in price. We are not guessing, we are trend following.

For those seeking a little more bang for the buck, the leveraged equivalent of trading silver is AGQ, which will move twice as fast on the upside of silver moves (and fall twice as fast if wrong). AGQ is also on a Buy Signal:

AGQ

AGQ

SLV is another commodity that is in the groove right now, trending nicely in one direction and then another, leaving plenty of room to pocket profits without having to trade every tick every day.  This is a new way of attacking the market for most of you, being content to hold positions over weeks or months knowing that ultimately these trends will work in your favor with respectable percentage returns for your portfolios.

The stock market is a mess right now and although most of the trends are pointing up, there is too much “breaking news” politics for my liking.  The fact is that after weeks of this “debt ceiling crisis” there really hasn’t been any real news, just a steady stream of well dressed and well spoken senators and congressmen taking  turns at the podium to point fingers and pat each others’ backs,  at times doing so simultaneously.  That the equity markets could be held hostage to this chaos is the reason we trade an algorithm, and I don’t mean Al Gore. 

TREND TABLES

Indices

Indices

Commodities

Commodities

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Stocks 

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Golds 

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