Friday, October 8, 2010

USO Watch

It has been easy to love crude oil (USO) the last couple of weeks. The elixir of our economic lives rose intra-day for seven out of 10 trading days in a move that included two opening gaps to the upside. But mighty crude has fallen, with several bear signs accompanying an intra-day collapse 3.5%.

USO $35.84

Person's Proprietary Signal turned bearish during Thursday's drop, the fast stochastic showed bear phase, and most significant, the price fell to more than 1% below the 200-day moving average, after hopefully poking its crude little head above that level for two straight trading days.

USO is on my Slow Trading Watchlist, and in that analysis nothing has really changed. The 50-day moving average remains nearly 7% below the 200-day moving average.

News reports attributed the sharp drop in crude to a sharp rise in the value of the dollar against other major currencies. But a look at the currency charts gives little credence to that theory.

The dollar has been declining sharply against the yen (USD/JPY) for 13 out of the last 15 U.S. market days. And the dollar has barely budged against the Euro (EUR/USD) for two days running.

There's nothing in that narrative to account for the fact that USO hasn't recovered a significant part of Thursday's decline. If nothing really changed on the currency side, Forex can't be used to explain events on the energy side. Q.E.D.

On the bull side, I'll note that the parabolic sar remains in bull phase, the fast stochastic has turned up intraday, the price reamins well above the 20-day moving average, and the price is up intraday, although it has given back about half of its initial rise.

On the Person's chart, the decline brought the price rebounding down from the upper weekly pivot level, travelling halfway to the midpoint.

Person's Table
ppspps openupper pivotlower pivot
$35.84 $36.60 oct7 $36.53 +1.9% $33.84 -5.6%

On the chart, crude has really gone anywhere since May, fluctuating between $31 and $37. It has been a swing trader's dream, but without a trend.

Reversal Levels
  • $36.67, +2.3% (swing high)
  • $36.46, +1.7% (200-day moving average)
  • $35.84 <== You are here.
  • $35.33, -1.4% (Thursday's low)
  • $34.08, -4.9% (20-day moving average)
  • $32.20, -10.2% (swing low)
Bottom line: I never did really like crude oil as a bull play, and I don't like it now as a bear play. In fact, I don't like it all because of the complexity of its context: Crude inventories, refining capacity, drilling capacity, policy, political unrest in Nigeria and the Middle East, currency values.

Warren Buffet once said, "What doesn't work is when you start doing things that you don't understand ..." I agree.

But if I were to play crude, I wouldn't enter on the bull side unless the price breaks above its trading range, which would also set a new swing high and bring the price to more than 1% above the 200-day moving average.

Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment. No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

  • pps - Person's Proprietary Signal.
  • psar - Parabolic Stop and Reverse
  • ma20 - 20-day moving average
  • ma200 - 200-day moving average
  • macd - Moving Average Convergence-Divergence
  • sto - Fast Stochastic
About the glance: The colors indicate the state of each signal.
  • trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways.
  • sto: green for bull, red for bear.
  • sto zone: green for overbought (80+), red for oversold (20-), yellow for neutral zone
  • psar, pps, macd: green for bull mode, red for bear.
  • macd trend: green for rising, yellow for sideways, red for falling.
  • neutral.
  • ma20, ma200: green for above the average by more than 1%, red for below the average by more than 1%, yellow for within 1% either side of the average.

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