USO / Crude Update

Since we have a lot of new members who may not have had the benefit of following oil as long as we have, I'm going to try to show a brief overview of our expectations, the correlations and the big picture as well as shorter term trade.

First of all, USO / Oil saw a massive distribution phase last summer with 3C negative divergences on long term charts that led to the down trend and lower prices that have been the subject of much crude discussion. Different people have called bottoms at different times, Cramer being one of them, but as you'll see, it looks a whole lot like there is a bottom and he probably knows it, he just called it early and I suspect that was to help out his buddies on Wall Street as he is Goldman Sachs alumni and when you are GS alumni there are a lot of perks, for instance several of the last technocrat leaders / Prime Ministers of Italy and Greece have been Goldman alumni. Mario Draghi of the European Central Bank is Goldman Alumni.

The larger question for you to think about and consider is a person in Cramer's position who could be very helpful in creating demand or supply just when Goldman needs it via his depleted, yet still vast audience can be very helpful to Goldman and if Cramer should ever need a favor, who better to "Owe you one" than Goldman considering their "Global Reach" ? So I guess the question becomes, where do you think Cramer's loyalties are, with a bunch of nameless, faceless viewers who follow his every recommendation or perhaps to GS and other big players on Wall St.? Just a question you need to ask yourself when considering the charts below and the calls for a bottom which are seemingly endless.

Just a quick search with the keywords "Cramer calls bottom in oil" gave me the following results...

10/20/2014 "Oil prices near a bottom"

12/03/2014-"Could the bottom in oil be closer than we think?"

12/12/2015 Cramer Consults the Fibonacci-Queen, oil due for short-lived bounce around December 16th to 18th

1/15/2015 "Signs that oil may be near a bottom"

1/16/2015 "The price of oil has not yet hit a bottom"

1/30/2015  Oil's "Bottom could be around the corner" & "On the lookout for "V" or "U" shaped bottom next couple of months"

1/30/2015 "Cramer's Game Plan: Oil Bottom is imminent"

2/04/2015 "Have Oil prices finally bottomed?"

2/04/2015 "This smells like a bottom"

2/09/2015 "Cramer's 2 signs that oil has bottomed already"

4/02/2015 "We're at the beginning of a bottom in oil...but that doesn't mean it's going to rally"

4/15/2015 "Oil prices on a tear, but don't buy oil stocks yet"

4/30/2015 Cramer: "Buy oil stocks? Don't you Dare...There was a time to buy oil, that window has closed"

5/21/2015 "Oil prices not yet at rock bottom prices"

I'm not quite sure what to think. We've had a couple of themes and I'll show you why. At first it looked like oil was going to see a counter trend bounce early in the range, but as the size of the base and the amount of accumulation went on, it became clear it was too large of a base for a counter trend rally and that we were more likely looking at a large base that would continue to form as it would have to be large enough to support what I believe will be a trend reversal in oil. I believe the base is defined between the two trendiness above. When prices are near the bottom we see 3C accumulation, when prices are near the top of the range we see milder 3C distribution to send prices back to the lower end of the range where they are accumulated.

Here are some of the initial, bigger picture charts...

 This is the daily 3C chart of oil futures. Last summer we had some heavy distribution right in the area of a H&S top (yellow). The green arrow is showing 3C price/trend confirmation or confirmation of the downtrend as 3C makes lower lows with price until right round the new year (2015) when the 3C charts start to diverge with price (positively/accumulation). At first it looked probable that oil (futures/USO) were going to make a counter trend rally, but as the base grew larger it was obvious it was overkill, much larger than needed for a counter trend rally and our theory was that oil would go on to make a larger base , large enough to support what would likely be an eventual intermediate or primary trend reversal in oil to the upside. That positive (leading) divergence is still in effect (white area).

The numbers on the chart represent the 4 stages of an asset's cycle. These occur within primary trends, they occur within swing trends of a month or more and they even occur on an intraday basis. Understanding where you are in a cycle gives you a good idea of where you are going. There are different hints and give-aways that help us determine where we are in a cycle, actually numerous ones, but you can often tell just from price action alone.

The H&S top on this chart is a stage 3 top/distribution cycle and this is almost always followed by stage 4 decline which is also marked on the chart as 3C confirms the downtrend in price. The positive divergence starting around the New Year "should" see a transition from a downtrend to a more lateral trend which is a stage 1 base. When the base is complete, we expect to see a breakout of the base and stage 2 "Mark-up" also known as "Participation". Typical 3C will confirm the uptrend here as well like it does at the stage 4 decline until a negative divergence is the first hint along with an increase in the upside rate of change in price as the asset enters a euphoric phase right before turning from an uptrend to a lateral topping trend , stage 3.

Currently oil is right between stage 1 base and what "appears" to be a stage 2 breakout, however we called this breakout in advance as a head fake move, meaning it likely would see distribution and would not hold. The reason for this is oil was showing negative divergences that suggested it would pullback toward the lows of the base where it would be accumulated again and likely be done with the basing process. However, when we have such a defined area of resistance, Wall St. knows that technical traders will buy and chase a breakout. We anticipated this false breakout (failed breakout) in advance as this is one of the ways downside momentum is created as new longs start to sell at a loss. "Failed moves lead to fast reversals", in this case I suspect the reversal will be toward the bottom of the base area where the base will finish up the basing process and move to a real stage 2 breakout.

 This is the same chart (daily) except with USO as the asset (ETF for WTI crude). You can see the same H&S top at #3, then stage 4 decline and a lateral stage 1 base.

Taking a closer look at the far right side of this base area I had said that it was very likely that we'd see a false breakout above the base's resistance trendiline (before it occurred) based on the concepts of a head fake move and the 3C signals we were getting at the time which were more consistent with a pullback than a breakout to a solid stage 2 "Mark-up" trend.

If you look at USO's daily chart carefully, you'll notice there was a head fake move March 18th, but in this case it was a break or stop-run below the base's defined support range. These head fake moves which we confirm with 3C charts are some of the best price-based timing indications for a trend reversal. In this case it was a run of stops just before USO made a move to the top of the range worth approx. 30+%. 

Much the same way the head fake/stop-run created upside momentum as new shorts were squeezed, creating momentum, the move above the top of the range serves the same effect, just to the downside. In the case of the March 18th head fake below the range, the same principle applies, "From a failed move comes a fast reversal", in this case it was a failed break below support that reversed to the upside and created strong upside momentum initially on the short squeeze of new shorts entering as price broke below the support range and were squeezed as price moved back above the bottom of the base.

All indications point to the recent move above the stage 1 base's upper range as being a head fake or false breakout that should see oil move back toward the lower end of the range to complete it's basing process as smart money doesn't chase prices higher, they buy at the lows of the range as you'll see.

 A very strong USO 6 hour chart shows trend confirmation on the move off the head fake March 18th stop-run  as 3C moves higher with price at the green arrow. However once price breaks above the top of the base's range at the yellow trendily, we see a dramatic negative divergence right at the very area where retail traders would be buying the breakout as institutional traders would be selling in to retail's demand, causing the large negative divergence at the red area which happens to fit exactly where prices broke above the range, indicating an extremely high probability that the breakout was a head fake or false breakout and price action since then has tended to confirm with no upside follow through in price.

 This strong 2 hour chart shows 3C accumulation (white) at the break below the range (head fake stop-run just before the trend reversal up +30%). Again, a negative divergence at the breakout above the range (yellow) is very clear. I didn't mark the divergence here because I didn't want my drawings to distract your attention from the lack of 3C confirmation on the break above the range and even worse, the negative divergence on a very strong 2 hour 3C chart.

This just confirms the expected false breakout we expected about a week before it even began.

This 60 min chart of USO in the base's range shows good 3C confirmation of most of the trends at the green arrows , but notice the clear divergence at the break above the resistance/top of the base's range just like the stronger 2 and 6 hour charts. However, while still being an exceptionally strong timeframe, the 60 min chart provides more detail than the longer 2 and 6 hour charts which are more trend.

At this point my expectation is for USO to head lower, although there will be the normal ups and downs we find within any trend which you'll learn more about below. We have a current USO equity short to take advantage of the swing trend lower. I anticipate it will move toward the base lows of the USO stage 1 range around the $16 area, however we will monitor the charts for any data that suggests otherwise (perhaps a smaller or larger pullback).

We can't ignore the $USD counter trend rally and the effect that it has on oil through the legacy arbitrage correlation. Here's an example...

 This is a 60 min chart of CL/Oil futures (candlesticks) vs the $USD (purple). Note there is an inverse correlation known as the $USD legacy arbitrage which is simply $US Dollar denominated assets move opposite of the $USD. For instance a lower $USD means to get the same value for a barrel of oil, oil price must rise to account for the weaker $US dollar. Likewise, a stronger $USD means cheaper oil prices. This correlation is typical for most $US dollar denominated assets like oil, precious metals, most commodities and in a non-manipulated market (which has seen unprecedented Central Bank manipulation since 2008) typically stock prices as well. 

The reason the $USD is so important right now is because of our $USD analysis and forecasted trends as oil (as you can see) has a clear correlation to the $USD (inverse).

We expected a downtrend in the $USD and have seen exactly that on daily charts breaking the strong 2014 uptrend, but we also anticipated a strong counter trend rally which played out last week with the strongest $USD weekly move since 2008!

 Daily chart of $USD trend change from up to down as a lower high and two lower lows have been made with a counter trend bounce (green arrow). This counter trend rally should cause downward pressure on oil near term, by the time the CT rally ends in the $USD and it starts making new lows, I expect there to be a decent chance it correlated with the expected real breakout to the upside in oil.

 $USD 30 min chart is still in line and suggesting more upside in the $USD as part of the counter trend rally.

 This 15 min chart of the $USD shows a "W" base with a strong 3C positive divergence that has been in line until recently at the red arrows suggesting a pullback within the counter trend bounce is in the making.

 The more detailed 5 min 3C chart of the $USD suggests the pullback in the $USD is closer , this "should" have an inverse effect on oil short term (bounce) and there are some decent reasons for a bounce short term.

 The 3 min $USD chart showing a negative divergence as well.

And now that it is hitting the 1 min chart, the timing is moving closer to a $USD pullback.

Remember this should have the opposite effect on oil near term.

Oil futures....

 The oil futures 7 min chart is in line right now with the price trend.

 As is the shorter term 5 min chart.

 However the near term 3 min chart shows 2 positive divergences in oil futures suggesting a small bounce is getting ready to take place, this would fit with the short term pullback in the $USD from the charts above being they have an inverse relationship.

And the 1 min timing chart in oil went from negative overnight to a building positive divergence suggesting we are getting close to a minor oil bounce.

USO short term charts...

The USO 15 min chart is a strong timeframe, but much more detailed. Note the clear negative divergence at the break above the base's range . This suggests a swing trend move lower.

 The 5 min chart shows several divergences and a current in line reading at the green arrow. It seems to me all of these divergences are related to gap fills, look closely.

 The 3 min chart shows a small positive divergence building like oil futures above, it looks like a gap fill is probable as there's a gap just above and USO has been filling gaps.

The 2 min chart is a timing chart. I suspect we see today's positive divergence continue tomorrow and probably lead to a gap fill. This may make for a decent short entry as I intend to keep the USO equity short (which is set up as a swing trade for a move lower) open. I don't see this as a trade with good risk/return properties, but as I said, it may make for a decent short entry for the larger downside swing trade.

Again, while the $USD is in a counter trend bounce, that should pressure oil lower along the lines of our swing short. However when the $USD returns to the prevailing downtrend, I suspect this may align with a larger trend reversal in oil to the upside, this is what I suspect anyway and we'll be looking for the evidence of such and of course of any other scenario the charts may point to, but at present, this seems like the highest probability.