Wednesday, February 16, 2011

USO: Will The ETF Catch Up?

I last looked at crude oil -- specifically West Texas Intermediate -- several weeks ago, and the technical set up was pointing to a strong price move and sustainable trend over the next year.  That set up remains in play although prices are hovering near the 200 day moving average.  In essence, the technical set up appears to be failing, but we won't know this until the end of the month.  With lower prices of WTI, the risk on this trade has been reduced significantly.  In other words, buying now at these levels is low risk.  But we just don't want to buy indiscriminately, so here is the short term technical set up that needs to play out on the road to higher prices.  

The technical set up is best seen in the daily chart of the United States Oil Fund (symbol: USO).  See figure 1.  The yellow (or yellow and red) dots on the price bars are key pivot points.  These are areas of support (buying) and resistance (selling), and the set up or price pattern is similar to the one I discussed earlier in the SPDR Gold Trust (symbol: GLD).  USO has already traded below the most recent key pivot or support level at 36.14; this is not good price action.  Old support is now resistance.  Rising trend line support is threatening to give way as well and this is in the vicinity of a down sloping 200 day moving average.  Once again, this is not good price action.  If the original trade is going to work out, then prices will need to reverse from these levels and trade trough the new resistance levels at 36.14.  This is your entry point.

Figure 1. USO/ daily

This technical set up or pattern is similar to the one highlighted in the article on GLD and can be seen in the Summer, 2010 bottom in USO.  

Lastly, just a brief word on USO, West Texas Intermediate crude oil and Brent crude oil.  The spread between WTI and Brent is at historic levels with Brent at a premium to WTI.  This apparently due to diminishing North Sea supplies and Middle East tensions (for Brent) versus increasing supplies for WTI.  USO tracks WTI.  I contend this isn't a supply demand issue but too much money chasing too few assets.  The question remains if WTI will play catch up here.


DeathBySavagery said...

"I contend this isn't a supply demand issue but too much money chasing too few assets."

That IS a supply demand issue! :-)

I think what you mean is that it isn't a PHYSICAL supply/demand issue, but a FINANCIAL/INVESTMENT supply/demand issue.

Guy M. Lerner said...

yes ...not the traditional supply demand issue where the oil is being used to power trucks that are building plants that are making widgets

Toptick said...

On the long side, you may want to use USL rather than USO. USO has had severe negative roll yield since the fall of '08, and systematically underperforms WTIC. Because of the way it is structured, USL has less of a problem with futures contract roll overs.