USO Trade Set-Up

Plan your trades, trade your plan. I really don't understand how traders can simply chase price with no rhyme or reason, simply chasing price with no other edge. While I have engaged in this in the past and found various levels of success, I also found it puts your position at usually unacceptably high levels of risk which are usually evident in the risk:reward ratio which I use to set at 3:1, but have since decided that if I'm going to risk my money in the market, the risk:reward ration better be well more worth my while and generally look for at least 7 times more reward than risk, which puts some entries and exits at very uncomfortable areas emotionally, but after a decade of following underlying activity, I've found that emotion is not your friend, clear objective data no matter how hard it is to accept, is the best if not the only (legal) edge you have. It's not for everyone, that's for sure, but the market needs its losers to make its winners.

As we are now over a week past the original USO trade idea as it first started to take shape after the consolidation we called after the first leg up, I think it's time to give you the link to the newly emerging trade set-up and forward looking expectations posted on Tuesday Feb. 17th (a week ago) USO Update. 

Truthfully you could have and I believe a few of you have taken the information from that post and created trades (short USO) as a piggy back to our larger set up. This kind of free thinking and use of the data is what my ultimate goal is in helping to provide you an edge to supplement your own trading styles and strategies. Nothing makes me more happy than to hear of your successes based on the data and your own initiative. There are no gurus at Wolf on Wall Street and there's no intention to make you eternally dependent on what I post. In short hand everything I've ever published from my free site started a decade ago to Wolf on Wall Street has had the intention of leveling the playing field and teaching a person to fish rather than give them a fish as so many sites would prefer to do to keep you eternally bonded to their proprietary analysis. I believe good karma will take care of the rest and thus far it has as I couldn't be more proud and thankful for the members of Wolf on Wall Street and my ability to make helping others my profession. I love my job, I love my members.

Sorry about the sappy stuff, my larger point was simply about initiative using the data and concepts we've uncovered.

From the USO Update of a week ago as new information was coming to light and new probabilities, here's the very initial creation of the USO outlook and trade set-up... (all commentary from last week's post will be in italics).

"USO Daily Feb. 17th...

A lateral consolidation or rectangle. The technical implications, considering the preceding trend would be to look for a breakout to the upside and a new leg higher, but we also have a defined level of support, which makes a stop run before any upside breakout an increasingly likely prospect. Remember this chart or come back to it for the trade set up."

"the short term charts and the rectangle make an increasingly compelling case for a stop run below the rectangle which would be an excellent entry so long as the move was confirmed as a head fake with short term 1-3 min charts showing positive divergences in to any break of the rectangle's support in the area of $17.95-$18 and below....The 30 min chart shows plenty of gas in the tank, the counter trend rally we were looking for and I think that is still very much on the table, a head fake move below the rectangle would make for a nice call entry or just a long entry."

And since last Tuesday...

 We have seen the decline to the bottom end of the rectangle range, it's important to remember that in Technical Analysis dogma a rectangle is an unbiased consolidation/continuation pattern, meaning it carries no directional bias of its own, but rather depends on the preceding trend in to the correction which was up to give the consolidation its directional bias.

All of this simply means that from a Technical trader's viewpoint, the expected move out of the rectangle is a breakout to the upside. For numerous reasons which if you haven't read about already (from why this changed, what motivations are, what the advantages for Wall Street are and how we can use these to our own advantage) my two posts on the subject are always linked on the member's site, it may be some of our most important discoveries about how the market uses technical analysis against traders and how we can turn that to our advantage.

Part 1: Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap

Part 2: Understanding the Head-Fake Move... Motivation

The USO / Oil trade set-up is a classic take on all of the concepts in these two posts and should serve you well in any asset, any type of trading and any timeframe.

As you know, I like to use multiple timeframe analysis and multiple asset confirmation so I've just went back and checked on /CL (Brent Crude Futures which are different from USO's WTI crude, but the signals are just as useful).

 This is the Brent Crude Futures 30 min chart. The positive divergence to the left is the formation of the rectangle's support area and the negative divergence is last Tuesday's negative divegrence forming the rectangle's resistance area. Since then, the move to the downside has seen 3C confirmation as it makes lower lows with price. This is the trade that at least a few of you took in anticipation of the larger (long) trade set-up. Thus far it appears your position is ok, but as a head fake move starts I would not push it, the long trade is the higher probability or larger move.

The longer 60 min CL (oil futures) chart shows the first leg up before the lateral consolidation which we also called to the day and the most recent top of the range. Note the continuing leading negative divergence to the far right strongly implying the highest near term probabilities are for that break below the rectangle's support-EXACTLY THE OPPOSITE OF WHAT TECHNICAL TRADERS ARE TAUGHT AND HAVE BEEN FOR NEARLY A CENTURY.

 The larger 4 hour oil futures chart has a strong positive divergence and plenty of gas in the tank once the near term shenanigans are complete. Thursday I posted USO's chart and analysis since last Tuesday confirming our suspicions as well as forecasting the movements we are seeing now. The post is useful to see how all of this has unfolded, but also contains numerous charts including the longer 2 hour USO chart showing the same thing as above, still plenty of gas in the tank for additional upside moves, this is the strategic outlook. The head fake/stop run is the tactical execution of that strategic plan, but as always with the "Come to us" trades, we have the benefit of confirming our expectations before entering the trade and at very favorable areas.

 USO's intermediate 10 min chart is similar to the CL/ Crude Futures 30 min chart in that its leading negative, implying the head fake move below the rectangle is the highest probability which it was just based on our concepts which you can read about in the links provided above. In other words, the manipulation of technical traders is so predictable because of their predictability that we can forecast probabilities before we even have the signals to back them up.

This is today's intraday 3C confirmation of Crude's gap up and retracement and near break of the rectangle's support.

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 I said yesterday, there's a reason retailers price items away from whole numbers such as $9.99 (in fact there are reasons they use specific colors like red and yellow which you'll see in McDonald's, Wendy's and Burger King's color scheme as red is the first color your eye focuses on upon entering new scenery and yellow has a subconscious connection with hunger).

2) We'll look for signs of a decrease in price's ROC and a more lateral, "U" shaped or "W" shaped price trend.

3) Accumulation of the stopped out or short sold shares at volume and increasing positive divergences... Confirming the move is indeed a stop-run or false breakdown.

Take a look at the CL 4 hour chart and USO's 2 hour chart, there's still plenty of gas for a new leg higher in what is usually one of the strongest types of rallies, a "Bear market counter trend rally". These rallies have to be strong to overcome the overall bearish bias and get traders to buy, this is why they are some of my favorite long trades, they move faster and further than most bull market rallies.

USO is on the radar...