I use an exchange traded fund called United States Oil (USO) as the proxy for the price of oil. According to yahoo!finance, The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.
I show a chart of the fund on the daily scale. I prefer this fund over others because the volume is so large. Over 16 million shares traded just today.
The etf has been trending downward since mid July 2008 when it peaked near 120 (only a portion of the decline appears in the chart). It closed today (Wednesday) at 31.43. Taken on a wider scale, it looks like a rounding turn, a bowl shape, but the chart has fooled me before.
The chart shows a head-and-shoulders bottom chart pattern. The left shoulder is marked LS, head is, well, head, and the right shoulders is marked RS. A neckline joins the two armpits, which I show as a red line. When price closes above the neckline, it signals a buy but that is only for down-sloping necklines. If the neckline sloped upward, then I would use the price of the right armpit as the buy signal. Why? Because steep up-sloping necklines may never trigger a purchase because price cannot catch the line.
A head-and-shoulders bottom is a bullish chart pattern and one that says oil and energy related plays are worth taking a look at. If you do your homework on oil plays like the oil services industry, you will find that older rigs are being cold stacked (put in storage). Some companies are trying to sell some of their excess rigs. I cannot recall any delays in taking delivery of new rigs, though. Also, research reports say that land based drilling is becoming scarce, given that both oil and natural gas have been trending lower. The deep water plays are where the action is. Drilling in deep water is more expensive, so larger oil companies take multi-year contracts on the rigs to do that type of drilling.
What is clear from looking at some of these stocks is that 1) they are cheap, 2) it may take longer for them to recover than expected. If you have a long term horizon, at least 2 or 3 years but perhaps much longer, like 5 or 10 years, you can do well.
Even though the price of oil, based on the above chart, appears headed up, I would like to see some confirmation. That could come from the big players increasing their capital spending for the coming year. From what I have heard, the spending has been getting cut amid a world awash in oil. Food for thought.
-- Thomas Bulkowski