Is This Crude Oil Breakout For Real?

  • Posted by on May 20th, 2013 at 4:10 pm
  • Comments: 0

Talk about a frustrating asset class. I don’t think anyone is happy and comfortable being in the oil space, bulls or bears. While the S&P500 has rallied to all-time highs off those lows 4 years ago, crude oil has frustratingly traded sideways this whole time.

Today let’s focus on $USO – the United States Oil Fund ETF. Since May of 2009, this oil fund has traded within a 16 point range between 29 and 45. Right now, they’re sitting somewhere in the middle around 34.50. The chart interests me for sure, but can this turn into a real breakout?

USO has built a nice symmetrical triangle since last summer: lower highs only to be met with higher lows. In April, oil prices fell below the lower trendline of the pattern, only to quickly reverse higher. That is signal #1 to us that prices aren’t ready to collapse. From false moves typically come fast moves in the opposite direction. So as far as we’re concerned, if that break was indeed a false move, then the fast move should theoretically be to the upside.

5-20-13 uso

To start the new week $USO broke above a declining trendline from the September highs. This is the first time it’s been able to do that. Now we want to see a series of higher highs to go along with the higher lows. That confirmation level to us would be closes above those early April highs.

As far as price targets go, the base of this triangle is about 8 points. If this breakout above 34 and change holds, then you’re looking at a measured move up above 42. This level also coincides with the highs from March of last year. So this resistance level would definitely be our target after confirmation.

But knowing the way this guy trades, I wouldn’t be surprised to see it whip around a little bit before making trending decisions. I guess we’ll see. Either way, I think it’s interesting that the Energy sector (as represented by $XLE) is breaking out to new 52-week highs as Oil potentially breaks out in its own right. Although their correlations aren’t as consistently high as you may think (0.49 for year), they do have a correlation of almost 1 for the past quarter. This could continue…

 

Tags: $CL_F $USO $XLE


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