USO-The Big Picture

Next week OPEC will meet in Vienna, according to the Financial Times, they are considering increasing quotas on production. The wild card here is that Iran's president, Ahmadinejad , who is locked in a power struggle with the Supreme Leader Ayatollah Ali Khamenei, has taken over the position as il minister. So not only does Iran control OPEC's revolving presidency, but Ahmadinejad himself is the president of OPEC. Who knows what will come out of that.


In any case, there are concerns among OPEC members that $100 oil will cause economic contraction which will ultimately hurt the OPEC members.


In looking at the USO chart, something I suspected, looks like it may be taking place. Taken with the possibility of quota increases and lower oil prices, it could be a very real threat.

This has been discussed recently so you should be familiar with it, what we have on the daily chart is a large bear flag (not a text book bear flag, but close enough). The consolidation portion showed some accumulation so a breakout was very likely and has since occurred. These days however, every breakout must be viewed with a degree of suspicion as there are so many false breakouts. You can see above the actual breakout only lasted 1 day before moving below the apex of the consolidation.

The price pattern target implications are serious, if this played out as a typical bear flag, w could expect USO to be trading around $33 which is an area USO has spent a lot of time at (approximately 2 years).

The Hourly USO chart shows confirmation to the left (green) which turned into distribution on May's negative divergence sending USO 5 or 6 points lower. There was an accumulation zone inside the consolidation which produced a short lived breakout. One of my suspicions has been that this breakout would fail and USO would start the next leg down, although it's never quite as simple as that.

 The 10 min chart shows the failure of the breakout and a positive divergence early today that allowed for a quick trade up to the gap. There still appears to be some strength left in USO, but not a lot.

Here's today's 5 min chart. There was the opening positive divergence that sent USO up to fill the gap and a negative divergence since.


I think it is possible that USO makes one more rally attempt. As of now, to most technical traders the consolidation has failed and that means in historic technical analysis vernacular, that USO is a short. We know how the market likes to shakeout positions so one final move back into the breakout range would squeeze the shorts and possibly pull in some longs which ultimately would be left holding the bag if/when USO breaks back down.


Although there's some money to be made on these daily gyrations, long term long positions should be watched carefully as it looks like the path of least resistance for USO in a macro sense, is down.


We'll see if USO can muster another bounce into the breakout region around $40+, at that point USO may be in very good position as a high probability, low risk short position.


One bridge at a time, but I think it's important to consider the macro implications in USO.