Catching the Falling Knife in Oil… Should You?

The sell-off in oil is no doubt one of epic proportions. 

Take a look at the United States Oil Fund (USO) weekly chart. We are now going on 10 straight weeks now without the least amount of a bounce coming through on it. Even during the Great Recession of 2008, you didn’t have a sell-off that lasted 10 straight weeks without some kind of bounce. 

To put it mildly, we will be talking about this oil sell-off decades from now. It will be the backdrop of which all future sell-offs will be measured by. 

“That’s nothing, I remember back in 2015 when oil sold off for over 10 weeks straight.”

“That’s no oil crash… 2015…now that was an oil crash!”

It is probably the biggest trading story of the year and bigger than anything that is going on in Greece, yet it is often ignored by the masses and the market still trades near its all-time highs despite it. 

Nonetheless, take a look at the oil chart to-date here and you’ll see that even if it gets a much needed bounce, the rally is likely to fall short of clearing the $16.30’s as there is heavy resistance on the daily and weekly charts:

And it comes at no surprise that traders of all types and account sizes are considering buying this falling knife hoping that they can reap the rewards of a massive short squeeze – the likes of which hasn’t been seen since the bounce the market had in 2009. 

However, I still wouldn’t touch oil or any of the companies directly and negatively impacted by the drop in oil. I mean, heck, the stock has already dropped 10 weeks-in-a-row, what’s to say it can’t lump on another few weeks to the grand total. The ego speaks here, the desire to be right in a big way, but your discipline must prevail and avoid the unnecessary risk. 

Manage risk first, no matter how great the opportunity appears to be.