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Published: August 2, 2010
Oil looks to be on the way down and I have
a way you can potentially take advantage of the opportunity with
an inverse
exchange-traded fund (ETF).
First, I want you to take a look at the chart for the United
States Oil Fund (NYSE: USO), below:
As you can see, the forecast trend is lower
for the next several weeks. My other forecast charts show the
entire U.S. market on a downward trend (more of this in my
Mastering the Markets premium letter).
With my data showing a possible decline in the price of oil, I
have selected an inverse ETF for this week's recommended trade.
The fund is the UltraShort DJ-UBS Crude Oil ProShares (NYSE:
SCO) ETF. This fund is designed to generate approximately
twice the inverse daily performance of the Dow Jones AIG Crude
Oil Sub-Index. Owning shares of this ETF, in theory, means that
as the price of oil goes lower, the price of shares of this fund
should move higher.
I should note, however, that this complex
securities product is designed to meet its stated objectives on
a daily basis. Its performance over longer periods of time can
differ significantly from the performance (or inverse of the
performance) of its underlying index or
benchmark during the same period of time and this effect can
be magnified in volatile markets.
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Technically, the ETF is giving a buy
signal, as it has just crossed my 10-week, time-shifted trend
line (blue line in the chart of SCO, above). It trades in zone
1, which means it has an historical price range that leaves most
of the range above the current price. This could provide SCO
room to move higher with what appears to be more upside
opportunity than downside risk.
I find it very interesting that volume has been steadily
declining for weeks on lowering prices. This is exactly the kind
of action I look for when my time-cycle forecast is in the
opposite direction. This gives me the potential opportunity to
buy shares of SCO on sale. I will be looking to pick this ETF up
on any oil rally.
Action to Take--> Assuming
no major flare-up occurs in the Middle-East, oil could move
quite a bit lower if my forecast charts are correct. Based on
this analysis, I think SCO is a good trade to put on with a
target price of $23.50 and an initial stop loss of $13.50. If
I'm right, investors could make a +47% return based on recent
prices. -- Mike Turner
Editor,
Mastering the Markets,
Trade of the Week
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