Trading position (short-term; our opinion): No positions in crude are justified from the risk to reward point of view.
Crude oil was just trading below 0. Well, not completely, but the nearest futures contract was trading below 0 for the first time ever.
In case you missed it, here's the screenshot from finance.yahoo.com and yesterday's price quote as it was falling.
Crude oil was just trading below 0. Well, not completely, but the nearest futures contract was trading below 0 for the first time ever. Ridiculous, right? Well, yes, and no. It's not that ridiculous if you take into account bigger supply due to earlier OPEC+ disagreement and lower demand due to Covid-19. Producers have to produce crude oil on a daily basis, because shutting down production is costly. One cannot store oil just anywhere and the facilities designed for it were already getting full. This means that people were unwilling to buy it, because it was not really possible to store it. To encourage people to buy it (and take delivery) anyway, producers paid extra instead of charging per barrel - more than $30 per barrel.
Sure, it was just the May contract, which expires today and the delivery is next month. The following futures contracts (the ones that expire in the following months) are priced at about $20 or higher. But will they be able to remain as high? The market thinks that the situation will somehow be resolved within a month. But will this really be the case? If not, we could see something similar once again.
Crazy times, and economic history in the making.
It seems that it would be a good idea to start today's very short technical part with the question that we just received, and go on to answer it.
Q: I opened a long position in the 2x etf oil stock today when oil was 4 dollars,,, I was curious if it is wise to hold? Im ok with holding for weeks if necessary but I am not too familiar with oil etfs so im not sure if when the oil price goes to zero does that mean the 2x etf ( HOU Bull) also becomes worthless? (...)
A: In our view, the situation in crude oil is too unclear at this time to justify holding any trading positions. Given the odds that the stock markets will decline in the following days, oil might fall even lower...
We cannot tell you if you should sell or hold your investment, as that would be an investment advice, and we cannot provide such.
Oil's value will not go to zero - only the nearest futures contract might. As the ETFs usually don't hold just one series of futures contracts, it's unlikely that their value would go down to zero. However, they could still slide very low - just because something fell to $1 or so, it doesn't mean that it can't fall by another 80% or so (to $0.20 in this case).
Since the situation in the futures market is too unclear right now, our chart analysis will focus on the most popular crude oil ETF, the USO ETF.
Looking at the long-term chart, we see that the USO ETF declined sharply in the previous month, which took it to the thin, red support line based on the previous important lows (those hit in February 2009 and February 2016).
The bulls staged a rebound at the beginning of April, but it turned out it was only a temporary break before the next move to the downside, which, this time, took the USO below the above-mentioned support line.
What's next?
Taking into account this month's breakdown not only below the thin red line, but also below the last month's low, we think that further deterioration may be just around the corner.
How low could the USO go if the sellers move on?
In our opinion, the first downside target will be around 3.36, where the lower border of the orange declining trend channel currently is. Nevertheless, if it won't stop the bears, the next support could be around 2.90, which is where the lower border of the red declining trend channel currently is.
However, when we zoom in a bit and focus on the weekly chart, there are some factors that the bulls can make good use of in the following week(s).
Let's take a closer look to see what we means exactly.
From this perspective, we see that the USO started this week with a big red bearish gap. The bulls just couldn't close it, and a pullback followed. As prices closed below the open, things don't look encouraging from the buyers' point of view.
Nevertheless, when we focus on the weekly indicators, we see that there are not only bullish divergences between the RSI, the CCI, the Stochastic and the USO, but that the current situation is quite similar to what we saw in December 2018 (we marked both situations with purple rectangles).
Back then, the combination of such readings of the indicators translated into a rebound in the following weeks. This time, the overall market situation is much worse, therefore, it seems to us that even if the reversal may be just around the corner, another attempt to move lower and a drop to the above-mentioned 3.36 can't be really ruled out.
Additionally, in this area, the size of the potential fifth downward wave will be almost equal to the first downward wave, which in combination with the long-term support and the situation in the medium-term indicators could encourage the bulls to fight for higher values of the USO ETF.
Summing up, it seems that crude oil will drop some more before rebounding. It doesn't seem like opening any positions right now is justified from the risk to reward point of view, but it soon might be.
Yesterday, you made enormous and unbelievable profits in crude oil - congratulations once again.
As always, we'll keep you - our subscribers - informed.
Trading position (short-term; our opinion): No positions in crude are justified from the risk to reward point of view.
Thank you.
Nadia Simmons
Day Trading and Oil Trading Strategist
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
