Tuesday, December 8, 2009

Oil ETF: Oversold

What seemed like a timely "call" back on October 8, 2009 "that crude oil could move significantly higher over the next couple of months" has kind of turned into a dud. Two weeks after this initial post, the United States Oil Fund (symbol: USO), the ETF that tracks crude oil futures, moved 14% higher. Since that time, USO and crude oil, have slowly given back all of those gains. From penthouse to the dog house.

So what gives?

Our original premise remains intact: 1) that crude oil was on the proper launching pad; and 2) that investor sentiment was somewhat bearish towards crude oil especially relative to other assets. In addition, when priced in multiple currencies crude oil was just beginning to outperform; however, this is the only premise that has changed or could be considered a "reason" why crude oil has put in a poor performance over the past 6 weeks. See figure 1, a weekly chart of a West Texas Crude Oil (cash data). The indicator in the middle panel measures crude oil's 52 week performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. Priced in these currencies, crude oil peaked last week at point where past and recent price moves also peaked.

Figure 1. Crude Oil v. Currencies/ weekly

Of note, the data in the lower panel comes from the Market Vane Corporation, which publishes the Bullish Consensus. As in October, the current value is 44 meaning that only 44% of advisers are bullish on crude oil; peaks occur when the value is above 80%. This in my opinion remains a reason why crude oil should remain on our radar screens.

So that brings us to today with USO trading back to our initial entry point. Yes it is a bummer. USO has become oversold to an extreme degree on the daily chart, and it remains above its up sloping 200 day moving average. The weekly chart has not broken down. I like this set up: oversold and above the 200 day moving average. A weekly close below the rising simple 40 week moving average at 35.45 would be reason enough to move to the sidelines.


Anonymous said...

Hey guy and Johnny, just curious, after today's sell off, are rydex fund still bullish? Thanks in advance!

Anonymous said...

Who wants to lose money in oil when you can lose money in gold!? That's my philosophy.

GreenAB said...


you could have the best of all setups.

but if the momentum crowd moves over to gold (as it did over the last weeks) oil will (thankfully) simply behave as it was supposed to be - boring, slow moving, range bound.

watch for volume in GLD to decline, while volume in USO picks up - that might be the time that the players are coming back.

Moments said...

Almost exactly when you were positing that oil was ready to run, I was concluding that oil was ready to fall. Via DTO, I entered into a series of seven trades which I closed today. My premise is not as clever as yours. Mine was based solely on the fact that oil had come way off the spring lows and is expensive relative to its long run price. Demand is way down. Supply is a glut. Technically, I didn't think I'd get too much worse than 80 a barrel against me, and I figured it would make it back to the low 70's, which I think will be the new top. But, I'm not SO sure, as I did get out, for today. As I look at this sentiment chart, it runs contrary to your suggestion that sentiment was increasingly bearish. People were adding to long positions all the way up to at least this chart's early December end. I don't think all those folks got out in the last few days (though today was a very high volume futures day...short term selling climax?) http://www.market-harmonics.com/futures/futures_market_sentiment.htm#Crude

I like your columns. Well thought out. If you trade eurodollars, you might like this equally technically adept analyst: eurodollars.wordpress.com

Guy M. Lerner said...


I have been long USO for what seems like 3 months now....watch go up and down and I am actually underwater slightly now; not happy obviously but it is all still withing the confines of my strategy....on the weekly chart oil is close to rolling over; OIH has rolled over and I recently sold XLE for a nice profit

I will check out the link