The set-up: United States Oil has been attempting to break through and has failed twice now, and the hourly crossovers suggest that it’s going lower.
This is a technical trade because I think it will re-trace half of what it made. Since it went from $9 to $9.60, I’m thinking it hits $9.30 – and maybe gets down to $9.20 – on the way down.
What I’m doing: I started by USO puts on Monday, buying a half-position when I bought 200 July 28 contracts, shooting for that $9.30. I planned to stop out if USO makes a new high from its last rally.
The decision I have to make is whether to fill the rest of the position with USO, or whether to instead play the VelocityShares 3x Inverse Crude Oil ETN (DWT).
What I’m looking for: USO had a double top and was stalling at the end of the day Monday. It was falling, which was why I decided to take the puts.
If the pattern stays the same, I will buy the rest of the USO puts when I see the crossover on the hourly chart. If, instead, I get some sort of clear signal on the hourly indicators, that sets up for me to make a move on the DWT. I’ll set my stop at $9.70 on USO.
Either way, I think this is a tight trade; there’s room for profit here, but this is about sticking with discipline, watching the chart and taking what it’s going to give you.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs. At the time this was published on RagingBull.com, he held USO puts – and was planning to buy more — as described here; he had no shares, options or open orders on DWT but was considering it as a possible trade for Tuesday, July 18.