Bottom for Oil?

02/10/2015 9:00 am EST

Focus: ETFs

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

Oil prices have been under pressure, to say the least; since reaching the 2014 high of $107.95 in June, the commodity is down 57%, observes Joon Choi, contributing editor to Systems & Forecasts.

iPath Goldman Sachs Crude ETN (OIL) is an exchange-traded note that tracks crude oil.

Technically, OIL had been in a slightly down-sloped trading range from 2010 to the middle of November 2014. But in November, it broke down through the range and has been trying to find a support ever since.

Meanwhile, the decline in prices has accelerated recently compared to the rate of the previous leg down. This pattern is significant because it generally provides a clue when the underlying vehicle is due for a bounce.

With the angle change completed near the weekly support area, we should see some stabilization and possibly a sharp reversal of oil price.

Another vehicle with direct exposure to oil is the United States Oil Fund LP (USO), which is structured as a limited partnership. This means shareholders will receive K-1s, which may be a burden at tax time.

However, there is no K-1 for OIL because it’s not a limited partnership but rather an exchange-traded note.

USO invests in near month oil futures, so it will track the spot price very closely. Hence, this product is a good vehicle for active traders who want to gain better exposure to spot oil prices.

In contrast, OIL’s holdings are weighted heavily towards longer dated contracts. Either of the two products above will give you exposure to oil but I prefer OIL because it does not issue K-1s.

Investing in oil is a volatile proposition and it’s not for faint of heart, but I believe oil prices finally found a support and will stop falling.

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