USO Follow Up...

Yesterday I posted USO Trade Set-Up which is an ongoing forecast not only since last week, but over a month now since we hot a low and popped higher as we had expected.

I don't mind saying that this is a bit of a head scratcher for me and I don't have all the answers, I wish I did, but looking at options for different trades and risk management should help clear things up and present some scenarios that may fit your goals or perhaps you'll find they are not in line with your goals.

Lets take a look...

Last night the API Inventories came out just after the close, there was a massive build of 8.9 mm barrels for the week. This morning's EIA Petroleum Inventories was posted last night as "perhaps" being the event that would give us a head fake run below support in the $18 area DURING CASH MARKET hours as last night's drop in crude futures didn't help our head fake situation with the stops we needed to hit on a head fake not trading normal cash market hours.

Sure enough, this morning's EIA Petroleum report came in at a build of 8.43mm barrels for the week above consensus of 8mm on the nose, yet crude is higher right now. Our stop run/head fake level was hit, although not hit as I expected, but my expectations really don't matter much beyond the fact that the expectation of a head fake move occurred as expected, how it happened are details that are just my opinion, not based on objective evidence.

I'm sure at one point or another you've heard me talk about what moves the market, it's not P/E's, it's not value, it's perception. While I'm taking a shot in the dark here, you know how companies report bad earnings, yet rally or great earnings but sell off, that's because what they did is of little consequence moving forward, it's the PERCEPTION of what they'll do next that matters. If earnings were bad, but it looks like things should improve, you have a positive perception and a stock rally o bad earnings. If earnings were great, so great that it looks like the company might not be able to top them next quarter, the perception is negative and the stock can sell off on spectacular earnings, this is generally based on the company's guidance which I think is the only part of an earnings report worth looking at.

Here are some factoids...

This is the 7th consecutive week of crude inventory builds which are now at a "Total Inventory" record high. Current inventories are 5 times higher than the normal 5 year average of inventories.

US oil production is at a new record high despite the falling rig count week after week.

Something doesn't make sense to me. Earlier it seemed simple, Saudi Arabia and OPEC were trying to crush the US Shale drillers as oil was /is being sold for less than most shale drillers can produce it. Previously the low prices in oil were said to have been to punish the Russians for getting involved in the Ukraine as Russian oil exports are big business for the country.

However, I suspect there's something else going on that we are not aware of. I could guess, maybe a showdown between the West and ISIS and we want to have plenty of supply on hand. Maybe something else.

Whatever the scenario, we know the perception is different than what we might expect. After 7 consecutive weeks of build at record levels, why has oil not moved lower and rather sits in our consolidation range after actually moving higher? Forward looking perception is obviously different than the current facts or what HAS occurred.

 As proposed in last night's Daily Wrap, the EIA report this morning may come in at a miss and give us our cash market head fake move below $18, the area I suggested you set price alerts at. While this doesn't look like the typical head fake, which tend to be stronger looking moves as different traders have different risk tolerances and they generally want to run them all out before a reversal, which means the head fake moves are extreme and believable, it is a head fake move in the form of a stop run and right at the psychological level of $18 as proposed (whole numbers attract the human mind and we subconsciously place stops and limits at whole numbers, which is probably why support was purposefully built around that level.

 On an intraday basis, you can see the 10:30 EIA report and USO drop below $18 on volume which are the stops being hit, that's what we were looking for.

From yesterday's USO Trade Set-Up, one of the two things we were looking for today...

"From here. if you are interested in the trade set-up, I'd set price alerts for a break and close below the psychological whole number of $18 (currently at $18.05). A break below $18 alone is not cause for an entry, it is our trade plan going according to expectations, after that we look for 1) Volume on the break below $18 where traders will naturally have placed stops and limit orders being the whole number is a psychological magnet."

As for the 3C charts intraday on the move...Well it's a positive divergence/accumulation of the hit stops.

The 5 min chart improved this morning as well on the stop run.

And the 1 chart I've been watching the most, the 10 min chart that signaled the probability of a lower move/head fake, is showing improvement here.

As for Crude Futures...

 The 5 min chart started going positive on the API inventory build after the close yesterday and continued to a greater extent on the EIA miss this morning, not what you'd normally expect, but exactly what we expected.

The chart closest to the 10 min USO which is kind of the line in the sand, also shows improvement. Yesterday's post had the longer term Crude Futures as well all the way out to 4 hours where there's a strong leading positive or what I'd call, "Gas in the tank" for continued upside.

Here the USO 30 min which has been in line since we called for a consolidation after the first leg up is now leading, a change.

And the 2 hour USO chart that has a wickedly nasty negative divergence BEFORE crude fell, has an interesting and strong leading positive divegrence.

My opinion has been this is a counter trend rally setting up, but we are now seeing signals that are approaching large enough to be a viable bottom in USO for a primary or Intermediate uprtrend, to be precise, we are not there yet in my view and would likely have to come down a bit to recent lows to build out the base, but that doesn't mean we can't have a counter trend rally and then a pullback and finish building a broader base that can move higher as a trend change.

So if I were considering Crude and I think I will put USO long in the tracking portfolio today, I'd decide on which trend I'm looking to trade and if it's the larger one, I might be a little more patient or phase in to a position, if it's a counter trend rally then I'd just have some stops below today's intraday low. One of the key signals will be the close and whether we have a bullish candlestick and increasing volume, if that's the case, then we are likely right in the front door of the continuation of the first leg of the move higher. 

For now, I'm putting a half size position in USO long in the tracking portfolio as a trade on the counter trend rally, if I had more time I'd wait until  just before the close and look for a bullish candle and increasing volume over yesterday, I suspect we get it.

If you are thinking of a longer term trend trade and a real bottom, I'd urge some patience, while bottoms are almost always tighter than tops, I still don't see this as large enough to support an intermediate or primary uptrend.