USO Update/Channel Busters

I've probably mentioned the concept of channel busters enough that you are familiar with it. Several of you are using a swing trade template I made for StockFinder, I would think about scanning for channel busters as they tend to make reliable swing trades. If you're interested, I can probably write and share the code for a channel buster scan. USO has moved about 3% the last 3 days, which is huge for this market, but if you used a leveraged ETF or options, this would already be a nice little trade. There's still the case of the longer term outlook for USO, but again we'll cross that bridge as we get the evidence.

Back to Channel Busters for a moment... I first heard of these in a book by Don Worden, you probably have heard his name, you probably didn't know that he created much of the charting software and technical indicators Wall Street used in the 70's-80's and perhaps even today. When I first read his books, I was almost angry, here's the guy who invented Telechart and everything that has came form that and he was basically challenging the Edwards/McGee philosophy (conventional technical analysis) which I thought was strange from someone who invented charting software that everyone used for conventional analysis.

I remember the 3 reasons he liked Channel Busters, in fact they were a favorite pattern: 1)Reliable 2) Low risk 3) You are shorting strength/buying weakness (two things that human emotion doesn't like to do, more so the former then the latter).

The beauty and the hard part of Channel Busters- For a channel break to occur, a stock (in the case of USO) has to have some good upside momentum in place, the beauty is this can create an overbought situation, the hard part is that you are shorting a breakout in what has been a strong trend, not everyone can do that psychologically. Or for downtrends, the opposite is true, it isn't easy buying a stock that has broken down below an extended downtrend. Just to make it harder, the news and sentiment will almost always run counter to your trade so you have to be a bit of an independent thinker, but if you give it some thought, these trades that appear to be the most risky are often actually the least risky. In any case, a lot more can be said about these trade set ups, let me just give one final thought. For all the reasons this trade works, then it should work even better when you look for them on a 5-day chart, the stock will be that much more overbought/oversold and the sentiment in the trend will be that much stronger which actually plays in to your hands considering the majority are wrong.

Here are the USO updated charts

 Today volume picked up as USO broke below yesterday afternoon's support.

 Here's a little longer view

 And the daily channel itself. Note volume and price.

 The 5 min chart negative at the channel breakout

Today's intraday trade suggests USO may get a little bounce tomorrow, it is not uncommon for these trades to revisit the channel.