We have a classic contrarian setup in oil right now...
The price of oil has fallen 28% in just the past six weeks and is testing the $42-per-barrel low it hit back in March. Lots of analysts are looking for oil to fall even further over the next few months. And many of the financial television talking heads are looking for the price to dip into the $30s.
Oil has fallen so far, so fast... hardly anyone has anything bullish to say about it. Virtually everyone is rushing over to the "short" side of the boat.
But in the short term, I'm looking for a bounce. Here's why...
Oil stocks have already bounced off the bottom they hit on August 7. The Energy Select Sector SPDR Fund (XLE) rallied more than 3.5% last week. And oil stocks tend to move ahead of the commodity.
So even though the price of oil fell about 3.5% last week, traders ought to be looking for a quick bounce.
I also like the look of the chart of United States Oil Fund (USO) – which tracks the price action of benchmark West Texas Intermediate crude oil...
image: https://files.growthstockwire.com/images/jy-77271942_4B8JD7NB55.png
This is a classic falling-wedge pattern (the blue lines) with positive divergence on the moving average convergence divergence (MACD) momentum indicator. In other words, as USO was making lower lows, its MACD was making higher lows. This type of bottoming pattern can often lead to quick, short-term moves to the upside.
In this case, USO looks poised to rally back up to resistance at either $15 or $15.50 per share over the next few days.
That would be the equivalent of oil rallying back up to $45 or $46 per barrel – where it was trading earlier this month.
Keep in mind, this doesn't mean you should pile your entire bank account into oil futures contracts. Buying oil right here is still a speculative trade... and the commodity is still in a downtrend.
But if the television talking heads have you drooling over the possibility of profiting by selling oil and oil stocks short right now, you might want to hold off for a few days... Oil looks poised for a quick, short-term bounce.