USO Update (Crude)

There's really not much reason for oil to rise given the recent spate of global economic downgrades, the one reason is as we saw with a recent announcement last week that the Saudi's cut back supply through September and many believe they've done the same through October and will announce that soon as well.

The other issue is the $USD which as we suspected about 2 months ago was starting to return to the pre-QE/F_E_D intervention legacy arbitrage correlation , in which dollar denominated assets move opposite the dollar; assets like gold , silver, oil and stocks. This correlation use to be just about as good as any JPY based carry trade correlation was like USD/JPY before those started going south (the correlation).

$US Dollar Index (green) vs USO (Brent Crude) red on a daily chart shows the typical legacy arbitrage correlation.

Over the last several months the $USD has been on a tear with 12 consecutive weeks of gains when we noticed several stronger negative divergences, a week later the $USD had broken the weekly gain with its first decline, just after that the F_E_D came out and said they were concerned about the $USD's strength effecting growth prospects for the global economy and we saw numerous F_E_D speakers hinting at another round of QE, Bullard in mid-August suggesting extending the current round of QE before he backtracked on the comments a few hours later, but that wasn't in the headlines. It seemed to me the F_E_D was doing what MArio Draghi of the ECB has been doing (whether effective in his case or not is debatable) and jaw-bone the $USD lower as the end of QE or dollar destruction was what was sending the $USD higher in a front-running long $USD trade.

USDX breaks out of its trading band on 12 consecutive weeks of gains and starts to falter as the F_E_D piles on.

As for the $USD itself...

 There were several divergences in the 60 min range that were turning south as we were warning of upcoming problems in the $USD a couple of weeks before it broke the weekly winning streak. This 4 hour chart is showing a fairly substantial negative divergence in the $USD which would "normally" have a beneficial effect for many dollar denominated assets. 

The 30 min $USDX with a negative sending it lower...

The 15 min chart confirming the price trend lower thus far.

And the 5 min also confirming the trend thus far.

We've had pretty good success with USO signals when they're strong, we called the 2008 USO / oil top within 2 weeks after a huge bull market during the GW Bush administration as oil jumped from the teens to near $150, ironically the same week Cramer told viewers to buy oil on the next bad EIA report/pullback as a "Contrarian trade", one of his finer calls as everyone who bought, bought at the top and just how is it that millions of viewers all doing the same thing at the same time is considered "Contrarian"? In any case, it seemed like Cramer was providing demand for some of his richer friends to exit oil.

As for Brent Crude Futures...

 /CL 60 min with a positive divegrence and a fairly large, flat base.

/CL 30 min moving off the right side of the base.

And /CL 5 min suggesting a possible pullback.

For now, I'm sticking with the USO November 22nd calls bought and added to, but there may be an opportunity for a longer term trade here and one with some diversification.

 Daily USO 3C chart with several divergences and a strong leading negative in June sending USO lower. I don't see a primary trend base or positive divergence, but this can still be a worthwhile trade.

 The 2 hour USO chart shows a H&S top, the trendline isn't drawn exactly right, but you can see it as well as the distribution in to the stage 3 top formation. The price pattern implied downside target of approximately $32 was met and surpassed as is usually the case with these targets, but is starting to show a fairly substantial 2 hour positive divegrence as if USO is working on a base here.

 The 30 min chart shows the same with distribution at the H&SS top and recent accumulation while the downtrend had near perfect 3C confirmation, making lower lows with price.

This is a closer look at the 30 min chart and potential base. The accumulation has been at the lows of the range.

This 5 min chart shows the accumulation has been at the lows with light distribution as price climbed a bit.

For now I'll keep the long call options in USO, but if it forms a bigger base, perhaps puts in a head fake move below the trendline, I'd have to seriously consider a leveraged long as this would be some nice diversification.

You might consider setting price alerts for the $30.30 and $30 areas to remind you if USO does make a pullback to a wider base.