Several readers have emailed wondering whether oil would be a good buy at this level. The most obvious reason has been the devastating oil spill with all its implications. Let’s take a look at a 2-year chart of oil as represented by USO, the heavily traded ETF:
As you can see, oil has gone nowhere in the past year and has pretty much traded slightly above its long-term trend line before breaking it sharply to the downside late in April 2010 (red arrow).
Last Friday alone, USO dropped 4.61% and now resides below its long term trend line by -13.84%. Year to date, it’s down almost 17% and all of its momentum numbers are negative.
Apparently, many readers were of the opinion that oil should rally in view of the current oil spill. The reason that this did not happen, and the opposite occurred, is that oil prices fluctuate based on supply and demand in regards to economic activity.
The European debt crisis has again raised fears of a double-dip recession causing oil and energy products to head south. Look at the chart again. You can clearly see that this is what happened in September 2008, as the recession took hold, USO broke through its long-term trend line and those who held on suffered steep losses.
Given the fact that a resumption of the recession is a real possibility during the second half of this year, oil could head even lower. So, when would it be a buy?
I would consider it once it moves back above its long term trend line. At that point, at least you would have some assurance, although not a guarantee, that upward momentum has been restored. In the meantime, stay away from it as bottom fishing could be hazardous to your financial health.
Disclosure: No positions in USO