Posted 12/30/2014 9:02pm
Oil has been one of the most telegraphed stories of 2014, as we have seen Oil plummet 50% from the high. Right now Crude Oil is at $53 per barrel, the lowest it has been in over 5.5 years. While it is hard to say that this is the bottom for Oil, I think that there is going to be a big bounce soon. Why do I believe this?
First, everyone on the planet is bearish Crude Oil. It is hard to find anyone willing to make a bullish bet. We have seen huge short bets taken and continue to see big put buys in major oil/energy stocks. Arguably, this is a sign that the bottom is in. When sentiment is so skewed one way, there is a good chance that there will be a reversal.
Second, Crude Oil has not been more oversold in over 20 years. Even during the 2008 crash it did not get this oversold. Currently, Crude Oil has an RSI at 11, it is almost impossible to go any lower. The 2008 RSI low was around 25, to put things in perspective. With the RSI so low, I believe there is a good chance that we will see a big short squeeze, possibly taking us into the low 60s.
I will say that there is no reason for Crude Oil to bounce other than it is oversold. Every data point (inventory number) is extremely bearish showing huge builds. It is more than possible that we see a big down open in January, but I think that for those that want a cheap shot, OTM USO calls can be very profitable. The January 17th 22 calls are going for $.20. If USO were to bounce 15% (Crude Oil bounces to 60), these calls would be a 5-10 bagger. Another way to play USO would be to buy July ATM calls. This would be a way to play for a longer term move back up.