As recently as last week, Wall Street was wondering whether the worst was over for oil companies. After all, the price of West Texas Intermediate crude had finally retaken $48 per barrel on Monday before powering right through $50 the next day.
However, according to the Profit Scannerpowered by Recognia, the technical outlook for oil prices is far from clear.
On Jan. 20, the short-term “Know Sure Thing” oscillator began to give a bullish momentum signal for United States Oil Fund LP (ETF) (NYSEARCA:USO). This leading, highly traded oil ETF followed that up with a couple more positive indicators through Feb. 2, as well as a cross above the 21-day moving average — a strong bullish signal for the short term.
But then came Wednesday, Feb. 4. WTI crude fell back down to $48.45 as news broke that U.S. oil inventories were at an all-time high … and USO ultimately took a 6.8% hit, closing at $18.28.
At the Feb. 4 close, the Profit Scanner powered by Recognia identified three technical signals that suggest USO had been overbought and will come down. One of them was the Fast Stochastic. This oscillator compares the closing price to the price range over the past 14 days, and is measured on a scale of 0-100. When the Fast Stochastic spikes below 20, that suggests the security is oversold, and when it spikes above 80, that suggests the security is overbought.
In the USO chart above, you can see that both the %K and the %D shot above the 80 line into overbought territory, then started to creep back down out of it. (The %K is the “pure” fast stochastic, while the %D is its 3-bar moving average.)
The Profit Scanner notes that many technical analysts prefer to use more than one of these oscillators to make a decision — and, as mentioned, there were two other similar signals on Wednesday as well. The Williams %R oscillator also turned bearish for the short term, spiking above -20 before recovering. With this oscillator, -20 and -80 are often used to identify overbought and oversold conditions, and this signal suggests that USO is in a new downtrend now that it has started to recover from overbought.
And finally, the oil ETF’s Commodity Channel Index also turned short-term bearish on Wednesday. The CCI oscillator measures the security’s price relative to its 20-bar moving average, and is shown as a percentage between -100 (oversold) and +100 (overbought). At the Wednesday close, USO’s CCI fell below +100%, signaling the end of a bullish trend.
A clear takeaway from all of this is that it’s too soon to get excited about any particular rally in oil prices. Thursday was a great day for WTI crude (and the follow-up has been positive too) — but with all of these bearish signals in play, USO may not be out of the woods yet.
Profit Scanner powered by Recognia can help traders of all levels uncover these signals to determine the best timing to buy. Or use Profit Scanner’s technical insight to validate your own trading ideas. See how easy this powerful tool is to help you uncover hidden opportunities in the market.
