Volume Surging in USO and DXO Oil Funds

Dec 30, 2008: 2:05 PM CST

I’ve rarely seen volume flows shift so dramatically as I’ve seen in some of the crude oil related ETFs.  Volume has surged to almost 50 million shares transacting per day in two particular funds:  The US Oil Fund (USO) and the Double-Long Crude Oil (DXO) Fund.  Let’s look at these for what this might mean.

USO - United States Oil Fund:

USO reached a 2008 low of $27.73 before bouncing off that level into the current tenuous retracement underway currently.  From a quick analytical perspective:

The moving averages are in the most bearish orientation possible
Volume is surging to new highs on new lows (a possible sign of capitulation or aggressive accumulation)
A lengthy, multi-swing positive momentum divergence has been building under price since October
The 20 day EMA has provided overwhelmingly significant resistance since September

The same analysis applies to the DXO - Double-Long Crude Oil fund below:

DXO - Double-Long Crude Oil:

The only difference is that DXO has far less room to continue falling than USO, although both are roughly tied to Crude Oil prices and offer vehicles to trade if you prefer not to trade futures contracts.

It’s extraordinarily rare to see such pervasive and relentless downtrends in exchange traded funds, simply because of the diversification ETFs are expected to provide (as opposed to individual stocks).

That being said, there’s no avoiding that trading these vehicles offers both risk and reward.

It would appear that crude oil is forming a “rounded reversal” bottom, but trying to call a bottom has destroyed many accounts in this environment.  I suggest standing aside until price - at least in the USO - can break above its falling 20 day EMA though conservative traders may even want to wait for further assurance when price breaks above the 50 day EMA and then the 20 and 50 EMAs cross ‘bullishly’ to provide a confluence support floor beneath price.

Until then, buying now would be an aggressive - though potentially rewarding - play.

Continue tracking crude oil and other commodities and ETFs for clues to how the broader market might be affected by these developments.

Follow Afraid to Trade on Twitter:  http://twitter.com/afraidtotrade

Corey Rosenbloom
Afraid to Trade.com

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  • David
    Corey ,

    I can read between your lines hee hee ! Nice trade.

    David
  • Jack
    Only fly in the ointment is the massive carry in front month crude(contango).
    Like buying a really cheap beach house, but paying 40k a month in property taxes( for now-it flucuates).
  • Keith,

    Sorry - your comment somehow got trapped in the spam filter and I just released it. Normally, comments auto-post.

    There's absolutely something going on. What gets me is that oil is not like a stock (and oil-based ETFs are not like stocks) in that they could go bankrupt and go to $0 where you could lose everything. I don't see Crude doing that or even attempting it - if so, there would be worse problems out there than my investment.

    It may very well be a once-in-a-lifetime play to enter at these levels and I honestly can't see how we got this low so I'm - disclaimer - quite bullish short and long-term on crude oil (and related ETFs) but we haven't seen the price rise yet. I'm convinced we will, and those getting in at these levels will be handsomely rewarded but they may have to have deep pockets and a longer horizon.

    Either way, these prices going into 2009 are beyond belief... which may explain all the volume.
  • Andrew,

    I'm kind of with you there. I honestly don't see how people can resist buying at these levels. It's still risky, but it's so overwhelmingly tempting. $2 for a crude-oil based ETF? One might have to hold for a while but one envisions it rising much higher than the current level given a decent timespan.
  • Andrew Stanton
    Technicals be damned, at current prices the DXO is like a perpetual option.
  • Ah, that is one of the hidden benefits of futures trading (along with FOREX). Always verify with your tax professional, but in general, futures receive "60/40" Treatment, wherein - unlike stocks where you pay all gains taxes on short-term capital gains (held less than a year) at your tax bracket (which may be up to 35%), in US futures, no matter how long you hold the position, 60% is treated like a long-term capital gain (where you pay only 15%) while only 40% is treated like a short-term capital gain (where you pay at your tax bracket).

    This makes a huge difference if your tax rate is upwards of 35% that you pay on short-term gains, but - currently - you only pay 15% of profit on long-term gains.

    Actually, better than have me explain it, refer to this mini-document from Futures Magazine.
  • Paul
    Hi Corey, could you please elaborate on "better tax treatment" for YM futures? Thanks, Paul.
  • planetelex
    Got it. Thanks Corey.
  • Planet,

    It's not so much that it's pointless, but that it should not be the determining factor. Rather, ultra (double) ETF analysis should serve as confirmation/non-confirmation.

    It's sort of like I do with futures on a daily basis. I'll scrutinize the intraday chart of the DIA for trade opportunities and set-ups, but instead of trading it, I trade the @YM Dow-Mini futures contracts for leverage and a whole host of additional reasons (better tax treatment, easier to size positions, etc).

    One can analyze crude oil futures or perhaps the USO and then when one is feeling particularly certain or aggressive, tack on a position in the DXO or some other ultra index (even including the equity indexes).

    Derivatives allow additional profits IF our analysis is correct and IF price moves in our expected direction.

    But in the case with options, one can be right about direction and STILL lose money (due to time compression, decay, etc) and the same is true with derivative ETFs that are 2x or even 3x leveraged now.
  • planetelex
    Good observation Corey. I was of the understanding that it was pointless using technical analysis on any of the ultra etf's. I'd be interested in hearing your thoughts on this.
  • Agreed. I noted the volume in the oil ETFs as well on my Tumbler blog...

    http://shepard.tumblr.com/post/66117943/oil-val...

    Value players or bottom pickers was my question...I think traders/investors are looking at these low as a once in a lifetime event since there's so much emotion wrapped up in oil. I think people "feel" that until there's a cheaper competitor to oil or until we figure out a way to transport ourselves & our goods differently ... oil is only going to go up from here.
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