Crude/USO Update

So far crude, despite all odds including massive builds at record pace, running out of storage room as the main supply hub at Cushing is at capacity not seen in 80 years, and the recent Saudi Oil Ministers remarks that not only has Saudi Arabia ramped up production to 10 mn barrels a day, but has no intent of ramping it down unless non-OPEC countries first lower their production.

You wouldn't think crude would have any ability to gain ground or even move laterally in what we have been viewing as a large primary trend base, capable of sustaining a primary trend reversal to the upside.

Near term EIA inventories will probably be out before I finish this post. Last night's API inventories came in at a build of 4.8 mn barrels which is down from the previous week at 10.5 min. EIA consensus is for a build of 4.75 mn barrels.

Taking a broader look...

 The USO lateral "W" shaped (Double Bottom) base.

You may recall our first thought upon seeing the first positive divergence at the January lows was for a sharp counter trend bounce, but as more time went on, it was obvious that the base was larger than needed for any such bounce, especially with all of the shorts who could easily be squeezed, At the Descending Triangle we expected a break lower, in fact not only to the January lows to widen the base to a double bottom, but in fact as is the case with almost all double bottom's these days (unlike what Technical Analysis has taught for decades), we expected a stop run below the level as well as inventory can be picked up in size and on the cheap without alerting anyone of anything.

The yellow arrows represent that stop run below the January lows.

 This is the 2 hour 3C chart showing one of the stronger negative divergences we have seen in assets just before oil started trending lower.

Someone knew something and they had deep pockets as they were selling and getting out of the way. This is the kind of 3C divergence that is rare, but that gives you an exceptionally sharp edge, but even with this divergence, looking back and putting yourself in the emotional moment had you shorted oil at the highs, it took at least 2 months of volatile chop back and forth forming a H&S top before oil dropped. With an intraday perspective, that's a lifetime and an event that "seems" like it will never happen which is why I encourage stepping back and gaining perspective.

This is a 4 week chart of Brent Crude futures and it has the exact same divergences as USO from the top's distribution to downside 3C confirmation of the trend to the bottom's accumulation. USO represents WTI crude, this isBrent Futures, rent is represented by the ETF, BNO.

I know I quote him often, but truth as they say, is true. As Jesse Livermore (considered the world's greatest traders) from the early 20th century said numerous times in numerous ways, "The trader who can be right and sit tight is a rare trader" and that it wasn't his brains that made him the big money, it was his sitting, after all a lot of traders knew what he knew and were right, they just couldn't sit tight. (paraphrased).

After falling and 3C confirming, the positive divegrence/double bottom should be clear.

 Here's a closer look at the same chart with confirmation of the downtrend at #1, the first positive at #2, the expected turn down to widen the base from a "V" to a "W" at #3 and the head fake/stop run at #4.

The 30 min chart with more detail confirms the 2 hour and longer charts.

The 15 min chart shows one of several reasons we called for a pullback and stop run as 3C was showing a short term pullback which at that point we had to change our view from a counter trend rally to something more sustainable.

 On a 5 min chart that divergence sending USO lower is obvious at the far left as is the area in which stops were run and confirmation at the green arrow.

I believe the base was strengthened in the area, but I also believe that it's not quite done and despite the recent higher prices, oil should be in need of a pullback to broaden the second bottom a bit more.

 This is a more detailed 2 min chart of the second base in the "W" with accumulation , but also notice recent distribution, not in any size that would effect the overall base, but enough to send prices lower so the overall base can be strengthened.

 The 3 min chart shows the same.

Looking at out X-Over Screen which is a moving average based system with additional ktriggers including RSI (Wilder's) and or the Ultimate Oscillator and in the middle window a custom indicator (yellow) with a 22-bar moving average like price above it.

You can see the sell signal as USO started breaking lower and the first buy signal which was whiplashed to a sell. I believe we'll need to not only see another buy signal before crude is really ready for a move, but likely on a longer chart like a 4-day (this is 3 day) in which it would be one large single buy signal.

As expected, EIA came out moments ago before I could finish this post, no matter.

As you can see, oil missed at a build of 8.2 mn barrels on consensus of 4.75 mn, that's a sizable miss.

However that may be just what we needed to get the pullback we have been expecting...

Although early since the release, the reaction is to the downside. If this keeps up as near term charts suggest it will, we'll be watching for short term charts to start accumulating again lower in the range and that's where we'll be looking for openings or add-to areas for USO longs.