If you were bullish on oil, this chart should immediately change your mind.
1. Price has been in a steep downtrend and has failed to even test its resistance (blue) line since November of last year.
2. We created an interim bottom the end of January and price has moved higher, rising almost 20% from trough to peak. Price failed to advance above the red resistance line in its 3 attempts and has now fallen back to the bottom (red) support line.
3. The MACD (bottom pane) failed to move above the zero line and its signal line is close to crossing under the indicator line which is signaling a potential change in direction to the downside.
4. All the moving averages are pointing down. A sustainable rally will rarely occur without all the moving averages pointing higher, moving upward with price
5. The recent volume profile is decidedly bearish as distribution is clearly taking place.
6. The RSI (5) in the upper pane is showing negative divergence
7. Lastly the RSI (14) in the second from the top pane has bearish hidden divergence.
Looking at the list I cannot see one positive for the price of USO in the short term and as such expect to see new lows in the next few months. This is not a place, unless you are the nimblest of traders, you should be looking to invest. There are never any absolutes in life (except death and taxes) so there is a scenario (or two) which could change my thesis dramatically and quickly. When markets are small it’s much easier for the strong hands to influence and even control the direction of price so if OPEC were to cut supply tomorrow, everything I have stated above would be wiped out. I would expect to see oil prices start to head quickly higher under that scenario. As investors, we always have to be on the lookout for those “nasty” news-driven surprises. But barring them, the current trend is down (and must be respected) so smart investors should be avoiding (or potentially shorting) this sector until we get confirmation the bottom is in.
Some of you may be thinking to yourself USO is just a proxy and does not reflect the real price of oil. In addition, with USO you have contango and other derivative-based issues associated with ETN’s that can make their price not track the price of oil. You are absolutely correct but remember my blog posts are intended to educate and not be used as recommendations. The oil price chart is bearish no doubt, but not quite as compellingly bearish.