The price of oil as represented by the exchange-traded fund United States Oil Fund LP (ETF) (NYSEARCA:USO) after a miserable 20-month decline from the 2014 highs started a meaningful bounce this past February.
Some analysts and traders were quick to call for a new bull market in oil, but while the multimonth rally was meaningful the USO ETF, thus far it only rallied back to a previous area of technical support.
Thursday’s bearish price action in the USO ETF left some concerning marks behind on the daily chart and active investors and traders may be able to take advantage of this for a trade to the short side.
For the record, I have always found it challenging to “trade” oil in the multiday timeframe due to its somewhat erratic movements.
However from a multiweek perspective, and particularly at important technical junctures, the USO ETF continues to give fairly reliable signals worth respecting and taking a chance on.
USO ETF Stock Charts
The first chart is the USO ETF with weekly candles.
While oil — and thus the USO ETF — has been in a steady decline for some time, i.e. the predominant trend has been and continues to be lower, several counter-trend rallies occurred along the way. Well-defined trends up or down from time to time need these backing and filling periods where traders take profits and allow some breathing room in the trend.
Important for trending assets through the lens of technical analysis is that in down-trends, the series — or lower highs and lower lows — remains intact and for uptrends — the series of higher lows and higher highs — remains.
Looking at this chart of the USO ETF, we see that in the spring of 2015, it saw a counter-trend rally that measured about 40%. A second counter-trend rally took place in the fall of 2015 measuring about 30%, and the most recent rally off the February lows measured about 60%.
Each of these rallies faltered at technical resistance points and resulted in lower highs. The early June highs of the most recent rally in the USO ETF coincided with an area around $12.50 that had acted as support in the second half of 2015.
In other words, while the rally off the February lows in oil was meaningful, thus far the trend of lower highs remains intact.
On the daily chart, we see that after marginally pushing above its red 200-day simple moving average in early June, the USO ETF recently dropped back below it.
On Thursday the USO fell about 4.5% and left behind on the day a bearish engulfing candle, which was the result of a failed intraday rally attempt.
Additionally, this bearish engulfing candle took place at a key confluence resistance area made up of its red 200- and yellow 50-day simple moving averages, as well as the up-trend off the February lows. With Thursday’s bearish reversal, the USO has now also visibly broken the well-defined up-trend from the February lows.
I always say that technical ‘levels’ and indicators are better used as reference points rather than absolute points where a stock is an absolute must-buy or sell. In the case of the USO ETF, now active investors and traders have a well-defined area of technical resistance around the $11.50 area to lean against on the short side, using an initial price target closer to the $10 mark.
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