Saturday, October 10, 2009

Why I Am Watching Crude Oil




The ETF for crude oil(USO) has been relatively quiet over the past four months which is why I would like to bring the above chart to your attention. The chart above is a weekly chart of USO along with the Bollinger Band study. Notice how the bands have been contracting and are closer to each other than any other time on the chart. This alerts me to the possibility of a trending move to begin in the very near future.

Notice also over the past few weeks how the price action has been very quiet yet we're seeing a sudden increase in volume for 3 consecutive weeks. This in my opinion is another clue that a move in the oil market is imminent.

The question that comes to mind is which way will this market breakout? Nobody knows the answer to that but I will say that there is a very dominant seasonal influence this time of year which usually puts pressure on the oil market. Having said that, I'd prefer to see a break down of this market which would be in phase with the seasonal influence. If however the market were to breakout to the upside, I'd probably go with it but I would definitely trade using smaller shares because I know the odds of an up move this time of year are slim but yet still possible.

7 comments:

Anonymous said...

interesting.i just got long crude oil on thursday based on my own technical analysis.I have a stop loss in place considering oil's volatility.Well lets see how this trade works out.I know I'm against oil's seasonal trend but plan to get out immediately if oil dances around at any of my goals.

Anonymous said...

Nice observation Kevin. I also think the break will be in the down direction. As you can see from the chart I provided, a massive head and shoulders breakdown occurred on USO and it is now in the process of doing a back test which is taking the form of a rising wedge. At the same time we know that Bernanke is cutting back on liquidity programs in Oct. so I expect deflationary forces to become more evident.
http://imgur.com/D0UPo.gif

DaveT

Anonymous said...

Hi Kevin,

Great post as always. I have a general question regarding to technical analysis. What if the long term chart (say weekly) is showing total different sign from short term (daily). Which way do you go with? Thanks


Joe

Kevin said...

Hi Joe,

The rule of thumb is to trade the daily chart in the direction of the weekly trend. This usually puts the odds of success on your side. I think the weekly chart is more important than the daily...if the two conflict I usually do nothing and look to trade another market. With so many markets to trade, there is no reason to force a trade. The best setups are when the daily and the weekly both agree with each other.

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andi said...

i think OIL is signalling broader market TOP

Anonymous said...

Kevin,

If USO breaks downward, what vehicle do you use to play the short side of it? Would you recommend DTO? Something else?

Former DXO winner (got out long before they shut it down)

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