Tuesday, October 23, 2012

Oil heading lower, possibly a lot lower

In my opinion, the recent actions in the price of oil and the United States oil fund (ticker USO) suggest that the price of oil is heading lower.



Looking at the charts of the USO and the price of West Texas Intermediate (WTI), I think we have two chart patterns forming here. First, both the USO and the WTI topped out on September 17 and declined on heavy volume, pulling into a short term low in the beginning of October. The rally attempt through the intermediate weeks in October have been on weakening volume trends along with muted RSI and MACD figures. Over the last three trading sessions, the volume has picked up to the downside, suggesting that there are sellers here. I think this setup suggest a pullback into June/July time periods.

The second chart pattern is more ominous if you are an oil bull. The June to September rally is essentially a 61.8% retracement of the broader decline that occurred between February and June. Looking at the volume trends, the June to September rally occurred on weaker volume than on the February to June decline. I have less confidence on this pattern, but if the signals are correct, the pattern could suggest that the USO falls below $25 and WTI falls to at least $60.

I keep the short oil exposure in the short trading portfolio.

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