USO Charts Follow Up

Last week we took a USO short off the table (straight short, no leverage) for a +15% gain, USO P/L and Follow Up. Interestingly after a week of volatility, price is just about at the exact same area, but it has had some time to put in a small reversal process.

If you have been following our long term analysis on USO, then you know that we have been expecting a break back in to a stage 1 base-like range and last week we got that move, Patience Pays: USO Breaks. There was so much congestion in the area, we needed a clean break of not just the base's upper trendily around $20.25, but a clean break of $19 where the congestion had been offering support.

Longer term I envision USO/Crude pulling back, maybe as low as <$16, we want to watch it very carefully there for accumulation of lower prices and filling out what has been a base area that has been in place just about all of this year. "IF" we se that accumulation as I suspect we will, USO looks to be one of the better looking long trend trades out there with a primary trend reversal of all the losses from last summer and a substantial trend back to the upside well above any recent highs loitering around the top of the base's range.

However for now, that break below $19 last week seems to have created a short term capitulation/selling event with a nice gap above which is what this latest trade idea, Trade Idea: USO SPECULATIVE (Long) Bounce, will be targeting.

I believe if we get that gap fill, we'll be set up for another USO trade, this time back to the downside with maybe a put position or a leveraged inverse ETF which should be the one to take us down to the lows where we need to be for the long term stage 1 base/price pattern to finish accumulating on the cheap before making a real breakout around the range at the $20-ish level. So... lots of potential nice trade set-ups in USO.

The reason I went with a smaller speculative position here is #1 the leverage, but more so just in case price comes back down a little to the $17 area to create a stronger "W" base, at which time I'd consider adding to today's speculative position size so long as we have strong objective evidence that such a pullback very near term, is accumulated. For now, USO looks like it has hit a short term flameout or selling exhaustion (capitulation) event.

 USO's daily chart with distribution at a H&S top last summer followed by confirmed downtrend and in to a lateral stage 1 base with significant positive divergences. Stage 3=top/distribution, Stage 4= Decline and Stage 1= Base/Accumulation, the typical asset cycle which also is fractal in nature and can be observed in any asset and in any timeframe whether on a daily chart like this over a period of a year or on a 15 minute chart over the period of a week, even intraday sometimes.

If you know how to identify the different stages and we talked a bit about that today when talking about "Changes in character leading to changes in trends" in the NASDAQ Biotech Follow Up (IBB) post (which had a nice afternoon/close).

 Taking a closer look at USO's daily chart for 2015, the change in character that stands out most obviously is the trend change in price from down to lateral, indicative of a stage 1 base following a stage 4 decline which ends with a high volume selling event or capitulation. Ironically, this shorter term trade idea is based on the same concept of short term selling exhaustion, a perfect example of how our concepts are fractal in nature and can be used in any kind of trading, in any timeframe.

Within the range we get a head fake move on March 18th BELOW support which triggers a bunch of stops and allows pros to accumulate the stopped out shares not only in size, but at cheaper prices. We almost always see some kind of a head fake move, in this case a stop run, right before a change in trend-I'd say 80% of the time making head fake moves one of the best price-based timing indications we have.

In like manner, the stop-run head fake move created a strong upside bounce as new shorts were squeezed and new longs chased price higher leading to a false breakout on the top of the range (second yellow arrow).

We can tell these are head fake moves or false breakouts (etc) by the lack of 3C confirmation or distribution in to the breakout. I really expected USO to fall back inside the range much more quickly, but it lingered around the top of the range for nearly 2 months, but ultimately we had the signals on our side and patience prevailed giving us a nice 15% gain using no leverage, Patience Pays: USO Breaks.

We were looking for the psychological support level of $19 t break and it finally did, but that left a gap above (orange area) and I suspect that's our minimum upside target, thus the use of a trade with some leverage to make the profit potential worthwhile.

 Volume analysis is not only a dead art form, but one very few new traders are even aware of and most of the time they have it completely backwards. The volume surge at the white arrow shouldn't be interpreted as a selling break by smart money, but rather a selling event by retail, accumulated by smart money. Either way, the large volume in the area is indicative of a selling/capitulation event, even if only temporary.

 See what the crowd misses, look where they don't look. Using a 5-day chart, suddenly USO's candlesticks give a cleaner picture of price action with a  stall in downside momentum on large volume putting in a bullish Doji star candle. Thus we have a pretty decent reversal candle to the upside and near term long trade.

 As for 3C charts in USO, this is an intraday 2 min chart showing the distribution of a head fake move on the upside or failed breakout leading to a downside move. Note 3C never confirmed the upside move and as mentioned before, head fake moves such as a failed breakout tend to be some of the best price-based timing indications for a trade entry or exit as price arcs lower with increasing downside momentum (our USO short and +15% gain), However notice the positive divergence in the area, the same area in which we have heavy volume indicative of steps being run leaving pro traders with a lot of supply at very cheap levels while retail is no longer interested in long oil, this makes for an excellent accumulation area and the 3C chart is leading positive in the area.

 The 3 min chart is more confirmation of a failed upside move and a positive divergence in to lows and higher volume.

 Here we have a pretty strong 10 min chart positive in the area that's pretty impressive. However as I mentioned above, part of the reason for a speculative position size is the chance of a "W" bottom base which is more stable for a bounce, price just needs to come down about $.50 to $.75 and we'd of course monitor any such move for accumulation which would be a prerequisite before adding to the spec. size position.

 As to the longer/stronger 15 min chart that shows a lot of distribution to send prices lower as we saw last week, it's about in line. On a USO bounce, I suspect this chart would go fairly negative setting up the next trade, USO short (or USO puts), a smooth transition tut of one trade and in to the next.

The longer term 6 hour chart which is very strong confirms the distribution area at the false breakout, this is how we determine whether a move is real or a head fake and allows us to take advantage of the trade long before it moves and long before anyone is in the trade.

So we'll give USO a shot; the calls were for an August expiration, much more time than I think I'll need, but it has worked well for me to use about 3x more expiration that I expect I'll need.