Bullish Oil Play But Not Yet

As I told Cycle 9 Alert subscribers yesterday… it’s extremely tempting to buy oil now that prices have dropped so sharply.

But don’t do it! Not just yet at least… just hear me out.

The United States Oil Fund LP ETF (NYSE: USO) is down a whopping 26% since mid-June. It’s trading at its lowest price since May 2009 and is deeply oversold.

Contrarians the world over must be thinking: “How much worse could it get for oil?” While they itch to buy.

Indeed, whenever oil prices find their footing we can expect to see a fairly sharp bounce higher.

But I think it’s still a bit too early to try catching this falling knife. Here’s my reasoning:

• Oil hit oversold levels (like we’re seeing now) in October 2008… but prices continued to fall for another 20 weeks, not finding their footing until March 2009.

• USO had a support level at $30 but this was strongly broken this week… so the ETF could fall as low as $23 — the 2009 low — before finding eager buyers.

• Seasonality will continue to be a headwind for oil prices through January or February.

From a seasonal standpoint, bullish oil positions (i.e. long USO) are best when added in January, February, March and April.

So, as tempting as it is to recommend stepping in now to buy oil’s fat discount… I think you’re wiser to wait a few months. Historically, oil prices have a tendency to slide lower during November through January. And this year, oil’s sharp sell-off has the look of a “falling knife” that could be costly for anyone trying to catch it.

What’s more, while the United States Oil Fund LP ETF (NYSE: USO), which tracks the price of WTI Crude Oil, is already down 26% in less than five months, a quick comparison of its price to the price of Brent Crude Oil (NYSE: BNO) shows USO has room to fall even lower through year-end.

Here’s a ratio chart plotting the price of WTI Crude (USO) versus the price of Brent Crude (BNO). As you can see, the ratio is in a long-term downtrend and has recently turnrned lower after hitting a wall of resistance (red line).

Oil Prices Still A Falling Knife

See larger image

I fully expect to get Cycle 9 Alert subscribers into a bullish oil play at bargain-basement prices. But not until the time is right!

Learnrn more about my seasonality research and how it helped subscribers secure a 73% gain during the energy sector’s “sweet spot” season here.