USO / Oil Overview

Today we had another piece of data, not oil inventories, but the Baker Hughes rig count which this week saw its 23rd consecutive weekly decline in rig counts, but it was also the smallest decline since December 5th and the slowest rate of decline in the last 6 months. The total rig count dropped by 8 (some say 6 depending on the source). The actual rig count of operational oil rigs is 888.

Additionally in a seemingly lost bit of data, the Saudis have once again increased production-surprise surprise.

To be clear, I am bullish on oil for the longer term prospects as a significant base that should be sizable enough to handle at least an intermediate uptrend (and with one more pullback to base lows with strong accumulation, a primary uptrend reversal) as such, this is a longer term trend trade that I look forward to entering, but for numerous reasons I have shown why I do not think we are at a sustainable breakout point yet.

If you have read my two articles linked on the members site, part 1: Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap and part 2: Understanding the Head-Fake Move... Motivation then you are likely able to understand why I said previous to April 30th that a breakout above the base's resistance range (in the USO $20.25 area) would be a high probability and likely needed for USO to back off and complete a constructive pullback that gathers a head of steam capable of slicing through resistance with follow through to stage 2 mark-up.

The charts may be the easiest way to look at the current situation, which I'm fully behind a traceable pullback that leads to a longer trend long position.

 The long term 1 day 3C chart unfortunately is not well scaled because of the relative tight range before the 2014 decline, but I drew in the divergences which you can check for yourself with the most important to the downtrend at a H&S price pattern to the far right of the higher range. After that 3C confirms the downtrend with perfect accuracy and suddenly starts going leading positive. At first I thought this might be a deeply oversold counter trend bounce brewing, but as the base went on and the divergence became larger, it was clear it would have been overkill for a counter trend bounce and it looked a lot more like a base for a trend reversal was being put in.

This 2 hour 3C chart shows the far right side of the base, the second low of a "W" bottom that had a head fake move running stops on March 18th just as it started the most recent trend up and above base resistance at the red trendily, an approx. +30% move. I've shown you other charts to the same effect, but this 2 hour shows the positive divergence at the head fake lows that broke below support on a stop run just before heading higher. The current issue with USO holding the breakout which I suspected before it happened would need to happen for USO to pullback (Failed moves create fast  reversals) is that the 2 hour chart should be in line , rather it shows distribution above the breakout area where Retail traders who have been told over and over by the talking heads on CNBC, "The bottom in oil is in", would have bought the breakout on technical confirmation or the very risky business of chasing price which most technical traders believe limits risk.

 This is the 60 min chart you have probably seen more often showing impeccable confirmation of the price trend until the first tag of resistance and then the breakout above resistance.

 Here's the entire base on a daily chart, it's a "W" base or a Double Bottom.

The difference bbetween double bottom bases now and the ones you see in Technical Analysis textbooks is that TA teaches the second bottom should fall short of tagging support, showing demand. However, once everyone started managing their own accounts with the advent of the Internet and cheap online brokers and the popularity of Technical Analysis went from "Voodoo Analysis" to mainstream in the blink of an eye, Wall St. had Technical traders number as they know exactly how they'll react to any given situation as the precepts or dogma of TA in many cases is decided and even centuries old. Wall St. adjusted, traders did not.

This is EXACTLY why a head fake move like the one in yellow at the bottom of the base occurs, it's an easy way for big traders/institutional money to scoop up a huge number of shares on the cheap without causing any raised eyebrows as the stops that are sitting right under support provide huge supply, thus allowing smart money to accumulate huge supply without driving prices against their position as would normally be the case in any normal supply/demand dynamic.

The breakout to the upside provides the same type of situation just in reverse in which retail traders buying on confirmation of a breakout provide the demand smart money needs to sell in to as they know they'll replace the shares at a lower level, it's the same way we look at these set-ups.

Today USO fell right to support, but I doubt it lasts long before a downside move that should see a significant increase in momentum.

 The 10 and 15 min charts are leading negative at the exact same area, above resistance telling us the same thing. All in all the base is still in good shape, but smart money won't accumulate up here when they can do so 20% or more lower with plenty of supply as recent new oil longs stop out..

Again note the near perfect 3C confirmation of 2 trends before the current divergence.

 This 3 min chart had me wondering a bit if we'd see a bounce Monday off support which is where USO saw some accumulation in small size, a "steering" divergence.

 However looking at the same chart intraday you see deterioration.

Beyond that, the 1 min charts in both USO and Brent Crude futures are negative suggesting they migrate to the 3 min chart and send the 3C divergence even lower. The large picture strategic charts and highest probability resolution are already in place (10, 15, 60 min and 2 hour), it's simply timing charts or "steering" divergences.

Here's the positive at this morning's opening low and distribution in to the afternoon right at yesterday's close.

In a near picture perfect image, the Brent Crude Futures 1 min chart show the EXACT same thing, a small positive at morning lows and distribution in to the close and at about the same rate.

Where USO pulls back to is another matter entirely. Initially I suspected to the low end of the range, but it could be somewhere around $18.75. Wherever it pulls back to, it will need to do some lateral work to repair those longer term charts and gather enough of a head of steam toils through resistance convincingly this time with follow through the days just after.

2 decent looking trades that dovetail in to each other.