Global oil demand is steadily falling. So OPEC (the Organization of the Petroleum Exporting Countries) has been cutting production to support the oil price.
All the while, the underlying fundamentals for oil remain weak. So speculators are short-selling into any rally.
With these competing dynamics in play, we can expect to see oil price volatility well into the future.
And one thing remains unchanged…
Markets overshoot in both directions. That provides plenty of trading opportunities.
We saw this last week when we traded the United States Oil Fund (USO). That’s an ETF that tracks the oil price.
And we came out with a 21% gain in just two days in my options advisory service, One Ticker Trader.
Today, I want to run through the trade…
More Than One Signal
The 50-day Moving Average (MA, blue line) in the chart below shows that USO has declined slowly since the start of this year.
Yet there have been swings within this overall trend, as the shorter-term 10-day MA (red line) shows. It has crossed the 50-day MA six times in less than six months…
United States Oil Fund (USO)
Source: e-Signal
Also, notice the action of the Relative Strength Index (RSI), a momentum indicator…
When it formed a ‘V’ and rallied (red circles), USO’s price gained too.
This happened when the RSI rallied from oversold territory (lower grey dashed line) in March and May… as well as with smaller moves like in January, February, and more recently in June.
However, this action in the RSI wasn’t the only thing we were watching closely…nor was it the only trigger for our trade.
We had also been monitoring the oil spot price too.
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It had already been hit after its initial gap on the recent OPEC production cut. The sell-off looked to be overdone with most of the negative sentiment already baked in.
Oil was trading at just under $68 per barrel, and we saw a major support level just above $67. So the odds looked ripe for a mean reversion to the upside.
On June 12, we took out a long position in USO by buying a call option. (A call option’s value increases when the underlying stock rallies.)
And that is what we saw… Take another look:
United States Oil Fund (USO)
Source: e-Signal
After entering our position, USO gapped higher the following day (June 13). And it opened higher again the day after that.
Our position showed a good profit, and the RSI was facing resistance (green line).
So we closed out our trade by selling our call option on June 14 for a 21% gain.
To be clear, we made this level of return by using options. If we had traded the USO stock directly, our gains would have been less.
But all up, we were in and out of the trade in just two days… and made a handy 21% gain with a chart that some might think offers little profit potential.
To learn more about how to join us in future trades at One Ticker Trader, simply go right here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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