Possible Reversal in USO US Oil Fund and Crude

Jan 20, 2009: 1:43 PM CST

Earlier, I showed the structure of the CRB Commodity Index and noted we might be experiencing a positive reversal, but let’s look now specifically at the US Oil Fund (USO) and $WTIC Crude Oil (Index).

USO United States Oil Fund:

We see an almost identical structure in the CRB Commodity Index.  Price is in a long-confirmed downtrend and price has found resistance at the 20 day EMA each time we’ve had a retracement there (which set-up good short-selling trades).  The daily EMAs are also in the most bearish positions possible.

Against all that negativity, we do see some hidden strength, as price was recently able to break above the 20 day EMA which is often a precursor to a price reversal, and we have a multi-swing positive momentum divergence developing under price – also bullish and seen at many reversals.

If we can hold at the current levels, we would have a higher low set in place and price would most likely swing up to the $40 level at the falling 50 day EMA for a critical test.  Whether or not we make it there, the risk is low compared to the ‘reward’ should we test that zone.  You would place a stop just beneath the December price lows at $27.70 to play for a possible $10 target should you so desire.

We seem to be seeing a large deal of people/funds ‘taking this trade’ perhaps believing also in a bullish bias as evidenced by the volume that is surging to new highs (around 45 million shares per day).  This either could represent capitulation selling or large-scale accumulation – we’ll soon see.

$WTIC Crude Oil Index:

This chart takes Crude Oil ($WTIC) from the July highs to the December lows.  Looking back, I know very vew people who could conceive of this possibility (price below $40 per barrel) becoming a reality.  However, this is an example of how markets in a trend can move farther than people expect and why it can be costly to bet against a trend (and why stop-losses were essential if you did decide to trade counter-trend).

Though price has been declining, the decline cannot last forever and eventually we will have a consolidation move and some sort of reversal – we may be experiencing that reversal right now, though of course time will tell.

You can almost ‘feel’ the price forming some sort of base or ’rounded reversal,’ and it would be quite bullish to see the Index close above the $50 level to mark an official higher low and then swing up to make a higher high and take out the 50 day EMA.

Continue to watch the crude oil market closely and consider whether you might want take part in this potential move using futures or perhaps other ETFs – depending on your own analysis and risk-preference.

Corey Rosenbloom
Afraid to Trade.com

15 Comments

15 Responses to “Possible Reversal in USO US Oil Fund and Crude”

  1. Anon Says:

    The recent surge in volume for USO says nothing about the capitulation. The former is a technical indicator and the latter a fundamental indicator. There would be capitulation if GDP growth reverses it’s negative trend. Are we there yet ? Nope. So with no projected growth in demand, the strong dollar, plenty of secured production and abscense of speculators : The oil is going to to be range bound in the 25-30$/barrel range.

  2. Kris Says:

    I guess the only missing ingredient for this cake to start growing is a macro spark- whether it would come from OPEC, some unrest in the Middle East or some kind of light at the end of the tunnel. The only problem I see is that post 70’s the median oil price for that time period is $26.50 per barrel… So if this crisis is to take a really nasty turn then we might see oil reverting to its mean rather sooner then later. But again, it’s all about the edges, there are never clear cut trades out there.

  3. Corey Rosenbloom Says:

    Anon,

    True, I left the volume rise up to interpretation. I for one think it could be accumulation. We’re not seeing the spikiness or despair seen with panic selling – it’s too smooth.

    I’m with you but from a technical perspective, the risk/reward seems favorable. Clearly not saying it will go up, but it appears to be at least at decent odds of a minor/intermediate reversal.

  4. Corey Rosenbloom Says:

    Kris,

    The interesting thing about oil is that it can jump just on rumors or attacks – so that’s always hanging over the shorts’ heads.

    I also think we’ve been conditioned to accept $100 per barrel oil as a reality so it’s insanely puzzling to see it this cheap.

    But I think you hit it – trading… much more than investing… is about finding and taking edges when we feel they’re present. It’s not necessarily about being right in our analysis – though that helps – but it’s generally about making more money than we lose and doing so with discipline.

    If oil keeps falling, we might take a loss of $3 to $5 or so. But if it rises quickly and reverses here, we’d stand to gain $10, $20 or perhaps more. That’s the underpinnings of edge.

  5. Manju Shekhar Says:

    Hi Corey,
    I had a question not directly related to this particular post. I wanted to wait for your daily index analysis post, but decided to post the question here.
    This has to do with a Trend day. When we have a Trend day which later turns into a Rounded reversal day, do you have any statistics as to how consistently the Market Internals ($UVOL > $DVOL & trending higher, A-D line skewed to one side), co-operate with the reversal, i.e. as the reversal from a trend day to a rounded day is happening, do the internals also reverse direction, & if so, how often? These stats can help us trade a trend day more confidently, without the threat of it turning into a rounded reversal day, if we just make sure the internals continue to trend too.

    Cheers
    Manju

  6. Corey Rosenbloom Says:

    Manju,

    Computing stats on Trend Days is one of my ‘to-do’ items but I haven’t officially compiled the stats yet. I do keep the TICK, TRIN, & Breadth open at all times and note the direction of each of those but I mainly use them as confirmation/non-confirmation rather than putting too much weight on them. My decisions come from price’s relation to the 20 and 50 EMA on trend days.

  7. Manju Shekhar Says:

    Corey, thanks for the response.
    So, say we have a trend down day in the index which is now pulling back to the 20/50 MAs, is also showing a multi-swing positive momentum divergence, followed by a first impulse, but the Market internals, breadth, etc. continue to deteriorate, would be looking to find an ideal place to go Short again, or would you position yourself for a first impulse Long swing swing trade, thus ignoring the internals? Personally, I would probably pass the trade altogether here, since I’m get conflicting signals.

    Cheers
    Manju

  8. Corey Rosenbloom Says:

    Manju,

    I wouldn’t necessarily ignore the internals – they can give you clues that price alone cannot so it’s important to read them but it’s all like a puzzle and you have to figure out how to weight each bit of evidence or each piece.

    It still comes down to risk/reward and edge (probabilities). If all lines up perfectly, go with an aggressive position but if a few things are out of line but not seriously, maybe go with a moderate position, but if you get a couple of serious non-confirmations or you just can’t interpret the signals because they’re conflicting, then it’s probably best to stand aside and wait for a better opportunity. The market will always be there in the future (we hope!) and there will be other trend days.

  9. Manju Shekhar Says:

    Corey, good point.
    Cheers
    Manju

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