The last time we wrote about oil on June 13, we warned readers “the market is winding up like a spring to make a decisive break out from the (triangle) pattern.”
Sure enough, crude broke out from the resistance around 98.00-99.00 and made an aggressive run up to 109.32 – just a hair below the February 27 high at 110.55. For futures traders, that move was worth about $10,000 per contract. (The oil contract is for 1,000 barrels; a $1 move in price is worth $1,000 per contract).
If you missed the move, dry your tears, because you may get a second chance, either trading the crude futures (CL) or a second alternative we’ll get to in a minute.
CRUDE FUTURES (CL)
Crude is currently pulling back from the recent high, a normal retracement after a strong trend. The short-term internal indicators are not yet oversold, and the intermediate term indicators are still overbought.
To us, that means there is still room for a further pullback before the indicators reach oversold territory and initiate a new price bounce.
The pullback could go all the way to the original breakout point 98.25-99.01, but it might not get that far. We are looking for a long entry around 100.50-101.50.
But how will we know when the pullback is complete? And what’s our target for the subsequent uptrend?
That’s where the alternative trade comes in.
THE ALTERNATIVE TRADE
Crude prices are tracked quite well by the oil ETF, symbol USO. And the chart for USO shows some interesting hints about where crude may go.
Here’s the chart.
USO made a bottom in the summer of 2011 and a second, almost identical, bottom in the summer of 2012. The first bottom was followed by a bounce that retraced approximately 75% of the original down move. The bounce from the second bottom is not completed yet. The 75% retracement would be 38.99.
USO is also the process of making an A-B-C move. The C top should be around – tah-dah! – 38.94. And USO is also making a 5-wave Elliott sub-wave move which should peak around – you guessed it – 38.90.
Given the confluence of indicators, we’re looking for a top in USO around 38.90. And that should correspond to the top in the crude futures.
USO can serve as a proxy for crude. We’re expecting a pull-back to the 35-36 area in USO; the bounce from that level should mark the end of the pullback in crude. Then we’re looking for a top around 38.90 in USO and that should also correspond to the top of the bounce in crude.
FUTURES OR ETF PLAY
You can trade this by trading the crude futures directly, but the contract size will require deep pockets. A less-expensive alternative would be to trade the ETF itself. Where crude goes, USO will go. And vice-versa.
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Polly Dampier is the brains behind naturus.com, where she gives active traders real-time market direction and analysis. To learn more, visit www.naturus.com
