USO: Black Gold Waiting to Erupt

Feb.22.09 | About: The United (USO)

Anybody holding a long position in USO has been absolutely decimated. The good news is no selling pressure will mount due to profit taking. There is simply none to take. The smart money might be slowly accumulating now, as the last three days of trading show signs of a basing formation being established. Friday's intraday reversal, on a spike in volume, could be a "clue" of a nearing capitulation. The shares are now 7% higher than their all time historical low of $22.74.

Further cuts in OPEC production coupled with spikes in activity, due to the unleashing of the stimulus package could alter the supply demand pattern more in favor of the bulls. China could restart their voracious appetite for energy. Lower gasoline prices have the tendency to prompt consumers to drive more, and we are nearing the heavy summer vacation driving season.

USO's bulging short position could create a huge wave of buying via short covering, if the shorts start to get nervous. The bears have experienced tremendous profits in USO, and getting greedy at this point would be darn right idiotic. They certainly do not want to see their profits go up in smoke, as an eruption of a "global crisis", occurring at any time, has the capacity to double the price of crude in less than a week. It is simply too risky to be short USO at this juncture, as its upside potential dwarfs its limited downside.

Be a contrarian: Crude has fallen an unprecedented amount. This has caused USO to implode nearly 80% from last year's highs. It has simply dropped too much in too short of a timeframe. Those who have the risk tolerance to buy now, set themselves up for the biggest reward. To exploit an over-reactive market, prudent buyers hone in on unpopular ideas, and USO 's sentiment is so negative at this juncture, it is clearly near an important turning point. The game is merely about buying low and selling high, and to do so, the investor must buy when an equity is unpopular and conversely sell, when it is popular. How else are you supposed to buy low and sell high? Easy to say, hard to do.

Bottom line: Do not be too tempted to catch a falling knife at this time, however we are getting very close to an appropriate entry point. If you look at USO's three month graph (sorry about the technical analysis) and create a declining tops line- you'll detect a potential breakout point near the $27 area. Sure you'll have to pay more, if you wait until that trigger point, but it will be worth it, as the trend will be in your favor (and you get what you pay for).

In other words, wait until Jed Clampett goes shooting for some food, and up through the ground come a bubbling crude. Translation: Place a buy stop order at $27.25 per share, sit back, and the first thing you know is : "you're a millionaire".

Disclosure: No position