Oversupply Slams Oil Market, But Conditions Are Oversold! (USO)Hi friends! Welcome to this analysis on the bloodbath in the oil market! Let's get right to it. looking at the daily chart, for the USO ETF, we can see that a massive head and shoulders pattern (in blue) was formed inside of the ascending parallel channel (in pink.) As you can see, a devastating breakdown occurred on November 1st, which smashed through the neckline of the head and shoulders pattern, as well as the 200 EMA (in purple,) and the bottom of the ascending parallel channel. Not only that, it did so on high volume. Naturally, a complete meltdown has ensued, as the bears engulf this vulnerable market. The question is, where do we go from here?
If we look at the height of the head and shoulders formation, and subtract it from the breakdown point of the neckline (vertical blue dashed trendline) you can see that it extends almost perfectly to the 61.8% Fibonacci retrace, around $11.60. So, the sheer size of the head and shoulders formation is suggesting a fall all the way to the 61.8% retrace. Price is currently nearing some decent support around the 50% retrace. So, I would be cautious about taking any new short positions here. If you aren't shorting the oil market already, it's probably best to wait for a bounce, before opening new shorts. Friday's candle was a quasi spinning top doji, which is a bullish reversal candle. So, I would wait to see if there is a bounce early next week. I'm particularly interested in a rally up to the "Overhead Resistance" level at $13. If price rallies up to that, and then reverses away from it, I will short USO with a stop order just above $13.30.
The MACD is showing continuous downside expansion, but we are deep in oversold territory. So, I wouldn't be surprised to see some consolidation, or a quick relief rally, while traders assess the fundamental conditions of the oil market. Speaking of fundamentals, there is a real concern that the market is heavily oversupplied again, in the face of slowing global demand. To put the recent decline into perspective, I read that it was "the greatest 10 day fall in the past 34 years" — a very ominous statistic.
Technically, a case could be made for a fall all the way down to the $10.70 level. I took the height of the ascending parallel channel, and I subtracted that from the breakdown point, and it projects a fall down to around $10.70, which corresponds perfectly with a few peaks from May and September. That is a very aggressive downside target, which would be produced by a fall to the upper $40's in the actual price of US crude. So, it's best to see how USO reacts to the overhead resistance zone first. If and when it fails to surpass that level, I will enter new shorts, with an initial target around the 61.8% retrace.
I'm the master of the charts, the professor, the legend, the king, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
