USO / Oil Analysis

Thankfully we still have good volatility here. Even if you're not interested in trading USO/Crude, there are some good concepts here that are worth looking over.

First we closed out the USO put position today on concerns I had earlier about a counter trend bounce,  Closing USO July 17th $20 Put Position . The trade yielded a decent gain of +45% for 3-days, USO Follow Up.

Now the question is where we go from here.

My view has been that USO is building a large base for a primary trend reversal. It has also been that USO/oil needs to pullback further to finish that base before it can sustain a breakout to a true stage 2 uptrend that will hold unlike the earlier breakout which we called in advance to not only happen, but to fail as a head fake move.

I am looking for a near term bounce that we can re-open a new crude short (options / put) position and when the time comes, to enter a long term oil long position for a reversal of the downtrend that started last summer. As for the USO equity short, that was left in place as a trend trade which I don;t concern myself with small counter trend corrective moves, options are different because of the leverage and time decay.

 The 1m intraday USO chart shows recent negative/distributoon and the call to close USO puts this morning as shortly after USO turned sideways , creating a small base it can bounce off-likely in to fill today's gap. We have positive short term (weak) 3C divergences to support such a bounce.  It is there that 'll look for a new put position opening on higher prices and a turn to distribution short term in the 3C chats.

The 2 min chart shows the concept of 3C migration. As a divergence (this time positive from the 1 min intraday) gets stronger, it migrates to stronger/longer timeframes such as this 2 min chart. Also note the flat price trade since this morning's closure of USO puts. I always want to close the option position BEFORE prices lose momentum.

 Even the 3 min chart is now leading positive. This is not a strong enough divergence that I would risk going long USO/Oil for a short term trade, but it tells me that we can let the trade come to us while maintaining out gains and open a new position at better prices and less risk.

The 5 min USO chart is starting to show the same positive /accumulation activity short term.

Even Crude (Brent)  futures are showing the same thing on intraday timeframes...

 CL / Brent Crude Futures 1 min intraday positive with a rounding bottom for a bounce, as I said earlier today, likely enough to fill this morning's gap and maybe some offering us a new position opening for a put/short.

I mentioned the head fake moves, very slight, like a channel buster that give an asset momentum, the yellow area is one of those head fake moves with distribution in to the move higher setting up a fast downside reversal which is  why we added to Monday's USO put on Tuesday. Today we have a 5 min positive just like USO and thus decent confirmation between Brent and WTI crude.

 This is the 60 min chart of USO and the channel/trend with a head fake below the channel for a strong upside reversal and then a second head fake above the channel for a strong downside reversal.

these can be seen on the 3C charts as false moves and why we added to the position upon confirmation.

This 10 min chart/3C of  USO shows the same trend at the same place with a positive/accumulated stop run below the channel (yellow to the left)  and the distribution ion to the head fake or false break above the channel (yellow to the right).  Note the distribution as new traders would have bought the apparent breakout of the channel as smart money sold to them, built in demand at higher prices,  this is why we want to do the same thing.

 The 15 min Crude futures show the same features, a move below the channel after downside confirmation at the green arrow and distribution telling us the break above the channel was a head fake or false move, which again is why we added to the USO put position. Now you can see accumulation (white) to the far right (today)  for a short term bounce . Let the trade come to you, don't chase.

 Here's a larger version of the same concept. The USO base's support line was broken on March 18th (yellow box) as stops were run and accumulated providing good power for the upside move. However you may recall, we not only predicted the move above the base's resistance range, but that it would be a false move/head fake and turn back down in to the range as it has (second yellow box to the right above base resistance).

 On a 3C chart (15 min), this is what the above looks like, the stops that were hit in mid-March were accumulated and like most false moves, there's a fast reversal (to the upside). 

In like manner, the false breakout above the base's range showed 3C distribution telling us USO was headed lower (second yellow box to the right).

3C is still leading negative so I believe we still have more downside to go before Oil finishes its longer term base sen at the bottom of this post.

The 60 min Oil futures chart shows the same divergences at the same areas, positive on the stop run below support and negative on the false breakout above resistance and to course we still have a leading negative divergence  which tells me I want to use any short term price strength to short in to for now.

On a longer term basis, last summer we had a clear negative divergence at a H&S top and a trend lower in which 3C moved lower with (confirmation). Since then, we have seen a large, strong base forming with a leading positive divergence, but the small red arrow in the white box represents the current pullback that needs to complete allowing lower prices and smart money to finish accumulating at cheap prices. Then I suspect we'll have a strong, primary trend upside reversal that WILL breakout and hold the breakout for a move higher.