Crude oil has been trying hard to make a bottom, but it may take a little more work to get it done. After hitting an important low in January, U.S. Oil Fund (USO) bounced and has been consolidating for nearly a month. The consolidation may hold, but as of today it looks as if the consolidation could also be a double (or triple) top. If the neckline is violated, the minimum downside objective would be slightly lower than the January low. We should note that the moving averages are negatively stacked (the fastest located below the slowest), indicating that USO is in a bear market, and that bad things are more likely to happen than good things. While the consolidation well above the low is promising, the PMO has topped below the zero line.
We use USO as a surrogate for crude oil because it incorporates the overhead inherent in owning futures contracts; however, we should probably look at the spot price to get an idea of where crude might be likely to find support. For that we'll look at $WTIC. Note that, where USO violated its important 2009 low, $WTIC briefly dipped into the zone of support created by its 2009 bottom formation. In my opinion, that makes the possibility of an important low in oil much more likely. That doesn't preclude USO testing its recent low or even violating that support, but I think that oil is going to find an important bottom within the support zone drawn on the $WTIC chart, which necessarily means an important low for USO.
Technical Analysis is a windsock, not a crystal ball.
- Carl
