The Short Oil Trade: ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), Proshares Trust II (NYSEARCA:SCO)

Stock Traders Daily offered a special report on August 18, that suggested investors short oil.  This special report was technical in nature, respecting oil's relative adherence to technical trading channels, as it identified the development of the right hand shoulder of a head and shoulders formation.

Specifically, using chart patterns from the more reliable ETF, ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), Stock Traders Daily recommended that investors buy Proshares Trust II (NYSEARCA:SCO) near $80.50.

Oil has been sporadic all year, it began the year week, experienced a stent of strength that was accompanied by more bullish bets than ever before in history in the oil space, and oil prices arguably got ahead of themselves.  In many ways, the fall in oil from its YTD highs was in large part due to the over exuberance that existed in the space, but supply concern still exist, and because oil prices were pushed to such high levels additional supply that was taken offline has had the opportunity to come back online.  This additional supply is part of the reason oil declined from its YTD highs.

Interestingly, after declining to neutral support levels, the bounce back in oil was directly related to renewed hopes that Russia and Opec would join forces to cap production, and those hopes were very reminiscent of hopes that drove oil prices higher early in the year, but leaders pointed to Iran as a thorn in that potential deal earlier in the year.

Even with that, history tells us that agreements between Russia and OPEC in the past have not been reliable, yet the notion that production caps may exist allowed oil to recover from its recent lows.

With the realization that fundamental attributes are less important to technical attributes in the oil space, our recommendation to short oil by buying SCO respects the technicals.

On Monday oil has already begun to decline after our recommendation, SCO was up about 4.5% from our call, but our recommendation suggests that additional declines can come and oil can fall below its recent lows, which suggests that there is additional opportunity to profit on the downside.

Although buying SCO above $80.5 would make the entry less than perfect, the declines in oil that have caused SCO to increase are offering confirmation to a developing channel and if that channel continues handsome profits are likely to still ahead on the short side of the trade.