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