Crude oil futures rallied nearly 6% on Tuesday, causing plenty of technically constructive action on its charts in multiple time-frames. The United States Oil Fund ETF (NYSEARCA:USO) — which tracks the price of light sweet crude oil and allows investors to play this market without having to dabble directly in the futures market — also broke past some important areas of resistance on its charts.
Active investors should take a bullish stance in the USO ETF.
It has been a miserable 15 months for oil bulls, via the commodity itself as well as through oil-related stocks. A slowing global economy and particularly headline concerns around slowing Chinese growth, a rising dollar and a generally lackluster appetite for risk from June 2014 into this past August has seen the USO ETF lose about 70% of its value.
USO ETF Charts
On the first chart below, however, we see that the drop in August — which of course coincided with a broader equity selloff — marked the USO weekly chart with a bullish reversal week while momentum (as per the Relative Strength Index) at the bottom of the chart made a higher low versus its early 2015 lows.
It then took a few weeks of constructive sideways consolidation below the 2014 line of resistance (black) until the USO this week finally perked up and broke above said line for the first time. While this is bullish it is however no sign to blindly chase the USO etf higher as it can remain volatile.
With the bigger-picture bullish construct of the USO in mind, let’s note that the recent multiweek consolidation phase took place in what through the lens of technical analysis could be labeled as a bullish flag formation that I highlighted in a blue box.
Note that with Tuesday’s rally, the USO ETF rallied right into horizontal resistance (still remains below it) but has overcome its yellow 50-day moving average and is trying to push out of the bull flag (blue box). From this perspective, the next bigger upside target now is the blue 100-day moving average, currently near $16.85.
But I would also note that the underlying crude oil futures currently reside within a few percent of a confluence resistance zone made up of its 100- and 200-day moving averages, which is to say that some immediate to near-term consolidation might be needed to store up enough energy to overcome this level.
The Trade
Active investors could look to buy the USO etf on any pullback toward the $15.50 area with an initial price target in the high $16 area. Any major bearish reversal particularly on a weekly closing basis would put the current bullish posture of crude oil back into question.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
