Stalking the bullish trend reversal in crude oil (OIH) – The Wagner Daily 
Getting off to a shaky start yesterday morning, the major indices were trading sharply lower after the first 30 minutes of trading. However, the bulls quickly took control, enabling stocks to reverse early losses and finish moderately higher. Shortly after the open, the Nasdaq Composite was trading 1.0% lower. But morning buying interest enabled the index to move back to the flat line less than an hour later. After consolidating through mid-day, the Nasdaq made another leg higher in the afternoon, enabling the tech-heavy index to finish with a 0.6% gain. The S&P 500 Index and Dow Jones Industrial Average followed similar intraday patterns before closing higher by 0.4% and 0.1% respectively. The small-cap Russell 2000 and S&P MidCap 400 registered matching gains of 0.4%. The main stock market indexes finished just below their best levels of the day.
Volume swelled across the board, enabling both the S&P and Nasdaq to score a bullish “accumulation day.” Total volume in the NYSE ticked 17% higher, while volume in the Nasdaq rose 25% above the previous day’s level. Despite the increased trade, turnover in the NYSE remained slightly below average. Volume in the Nasdaq edged back above its 50-day average. Overall, volume patterns in the broad market remain firmly positive, as “accumulation days” (gains on higher volume) continue to exceed the number of “distribution days” (losses on higher volume).
We like the pattern developing in U.S. Oil Fund (USO), an ETF designed to roughly track the price of crude oil commodity futures. In recent months, USO has been a laggard. However, it recently broke out above resistance of a five-month downtrend line, and is now consolidating at a pivotal level of horizontal price resistance. The setup is shown on the daily chart of USO below:
Drilling down to the shorter-term hourly chart interval enables us to more clearly see the ideal entry point, in anticipation of USO breaking out and making another leg higher. Take a look:
The dashed red line on the chart above marks resistance of the hourly downtrend line, which begins with the October 7 high. Notice the downtrend lines up with resistance of yesterday’s high, which converges with resistance of 40-period moving average on the hourly chart. As such, a rally above yesterday’s high would correspond to a breakout above several very short-term resistance levels, thereby triggering a valid buy entry. Regular subscribers should note our detailed entry, exit, and stop prices for the USO set up in “Today’s Watchlist” below.
In yesterday’s commentary, we briefly explained how we use the hourly chart interval for determining trailing stop prices to maximize profits on strongly-trending, winning ETF positions. Several subscribers subsequently sent us e-mail, saying they appreciated the mini-lesson. Since our new, tighter stop in EMB was not triggered in yesterday session, let’s take an updated look at the hourly chart and show why, and at what level, we are raising our stop again in today’s session. The first chart below is from yesterday morning’s commentary, while the second chart shows the price action through yesterday’s close:
Going into yesterday’s (October 12) session, our new stop in EMB was $112.35. That stop was just below the previous day’s low, which typically acts as a very short-term level of support, just as the previous day’s high usually provides very short-term resistance. But more importantly, a stop below the previous day’s low also worked out to being below the 20-period EMA on the hourly chart. Now, going into today’s session, we have raised the stop about $0.25 more, which is now below the October 12 low, as well as the rising 20-period EMA. Using this rather simple methodology of trailing stops on a winning positions enables us to maximize profits, while limiting the risk of giving back hard-earned gains.
Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: deron@morpheustrading.com.
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