USO / EIA Report Out

Sometimes I'm surprised by some of the early warning signals we get and how often Mass Psychology is just as effective as any other technical tol.

For example, yesterday morning's USO Update at 10:05 a.m. said the following in the first few paragraphs...

"Oil is now on track for its 4th consecutive daily gain and it appears, as usual, the bottom callers are in, just in time for what should be a little consolidation which will likely kick them out of the trade and turn them bearish again just as USO makes another leg higher.

Other than the Mass Psychology of calling the obvious long after it has occurred and taking it to an extreme of a "Bottom", which this clearly is not, the market is finally noticing what we have been forecasting for weeks, but it does look like we are at an area of natural consolidation, one I'm sure will be interpreted as "Oil is not at a bottom, it was a false start"."

Sure enough the warning signals we were getting yesterday morning which seem to be leaked data with regard to the after hours release of the API Crude Inventories which were higher than hoped for, sent USO down just as our charts were calling for some kind of pullback in crude.

This morning at 10:30 a.m. was the EIA Petroleum Report with the Bloomberg estimate of a build of 3.25 mn barrels, well that missed as the report was just out at 10:30.

 The EIA Petroleum report with inventories coming in at a build of 6.3 mn barrels, nearly double Bloomberg's estimate, which is precisely why USO acted like this on the 10:30 release...

1 min chart of USO's gap down from the after hours API inventories yesterday and the 10:30 EIA inventories today.

Even though the 3C charts of USO and /CL (Brent Futures), were both ahead of the curve and showing the probable decline/consolidation/pullback (whatever you want to call it), I think the closing chart of USO alone was probably enough to know something was up after  oil made its biggest 3-day move in 6 years!

Counter trend rallies are something to behold, this is one of the reasons bear markets are my favorite markets, they move down faster than a bull market rises and their counter trend rallies are stronger than any bull market rally.

 USO's Daily chart shows a longer upper wick on yesterday's closing candle, this means higher prices were rejected, but prices did move higher and that large volume with such a candle typically is a good indication of "Churning", essentially strong hands passing off shares to weak hands, which fits nearly perfectly with the Mass Psychology sentiment posted in yesterday morning's update,

"Oil is now on track for its 4th consecutive daily gain and it appears, as usual, the bottom callers are in, just in time for what should be a little consolidation which will likely kick them out of the trade and turn them bearish again just as USO makes another leg higher."

I believe I relayed the story of the October lows and how bearish EVERYONE was, even the "Buy the Dip crowd" and for that reason my hypothesis was that we'd see a very strong rally, but I didn't have evidence of it at that point, just the mass psychology and the broad and overriding concept that the market is a zero sum game, for someone to make money, someone has to lose money so everyone can't be on the same side of the boat at extremes for long and shortly after we got the 3C data and other indications that the October lows would produce what we called at the time, "A Face Ripping Rally", which of course it did, only about 3 days after we had already known it was coming.

While there aren't many good books on Mass Psychology and the markets and there are a lot of very general mottos like Warren Buffet's "Blood in the streets", this is one area of analysis that is very effective and if you have a basic understanding of candlesticks and volume, you can pretty much get a handle on Mass Psychology and sentiment.

USO's 5 min chart's positive divgerence, confirmation and relative negative divegrence, although some of the best signals were in Crude Futures (Brent)...

 The 7 min CL (Brent Crude Futures) shows the churning point at the highs which correlates with yesterday's closing candle and volume as well as the clear negative divegrence.

Longer term the 2 hour chart still shows USO as having gas in the tank.

I personally wouldn't be jumping on a USO long right now, people often react to quickly yo a price move they desire to see to get involved and forget or don't realize that things take a bit longer than we usually expect, there's almost always a reversal process rather than a reversal event and I'd want to make sure USO is being accumulated in to a pullback before I considered buying it, I suspect it will given this 2 hour chart's divergence, but lets let the market tell us that.