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Oil ETF Generates Sell Signal
by Carl Swenlin
September 25, 2009
United States Oil Fund (USO) generated a sell signal on Friday when the 20-EMA crossed down through the 50-EMA. This action took place a day after the price index broke down through the bottom of a triangle formation. A triangle formation is a continuation pattern, and this particular triangle had a slightly bullish bias because it was tilted slightly upward.
As a continuation pattern (a consolidating move that occurs prior to the resumption of a trend) this triangle also had bullish implications because it extended sideways off an advance from the March low. Primary evidence was bullish and it would be reasonable to expect the triangle to resolve upward. But it didn't because USO is in a bear market (the 50-EMA is below the 200-EMA). Remember, no matter what the broader market is doing, each individual price index has it's own bull or bear market depending on its own movement, and in the case of USO, bear market rules apply. This means that bullish setups are much less likely to deliver on their promise.
USO had a parabolic rise to a blowoff top near 120 in mid-2008. This was followed by a break down from the parabolic and a spectacular crash down to a low near 20 in February. This is fairly typical of the results following a parabolic rise. The next thing we should look for is a basing pattern that could extend over many years. This is where price trades in a sideways range, building a base from which the next big rally will emerge. Looking at historical prices and recent price action, my first guess at the range would be between about 20 and 40.
Bottom Line: A promising rally for USO has failed as prices broke down from a bullish triangle formation, the most likely cause being that USO is in a bear market. It is also in the recovery phase of a parabolic blowoff/crash, and this typically means that prices will run in an extended trading range. In the case of USO I estimate a range between 20 and 40.
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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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2008 TIMER DIGEST RANKINGS FOR DECISION POINT
#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT
#40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT
#11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year.
Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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