I’ve been making the case for a potential bottom in the US coal sector recently, including several of my top picks in the sector (and three active trades: WLT & ANR, both of which continue to look very bullish near-term as well as potential longer-term bottoming plays, and the etf- KOL). As the technical case for a potential bottom in coal has already recently been made, this 10-year weekly chart makes the case not only for a bottom in crude oil as well but also highlights the tight correlation between crude oil & coal, which typically move in sync with each other including major tops & bottoms.

As this 10-year chart of USO highlights, every single oversold reading over the past decade (and likely beyond) has either accompanied or slightly preceded a major bottom in crude oil prices. Currently we have the first oversold reading (<30 on the weekly RSI 14) since mid-2012 (which coincided with the start of a 36% bull market market in USO that peaked in Sept 2013). As I always say, oversold can always become “more oversold” but at the very least this chart helps make the case that the current bear market in oil (and coal) is more than likely in the final stages, if not already finished. It should also be noted that USO has currently fallen to the top of this multi-year support zone which has contained prices since the financial crisis ended.

Remember, this is a case for a potential bottom in the energy sector, namely coal & oil. By most metrics, these commodities are still solidly entrenched in a downtrend & therefore, any trades at this time should still be considered aggressive, counter-trend trades. My preferred strategy for establishing a longer-term position in the coal sector is to use a scale-in strategy (buying very small lots over time as long as a bullish technical case can be made) using a shot-gun approach (spreading out my exposure to the sector amongst various coal mining stocks with the most compelling charts). With coal prices in a prolonged & severe bear market, the possibility of one or more bankruptcy filings or dividend cuts (which will most likely cause the stock to drop sharply) among my top picks in the coal sector is a very real possibility in the foreseeable future. Therefore, the shotgun approach and/or the use of KOL (coal ETF) as a proxy to gain exposure to the sector is the best way to mitigate risk (along with appropriate stops based off of your average cost basis on each position). As always, DYODD (do your own due diligence) and only consider trades that align with your own trading style & risk tolerance.