COMMODITIES

The charts suggest that oil is forming a major bottom, and if confirmed, solid, risk-controlled entry points in a leading ETF and select oil stocks may soon be presented.

The reversal in the stock market last week was impressive, and with Monday’s sharp gains, some of the Advance/Decline (A/D) lines have overcome first key resistance. This makes it more likely that the stock market completed a significant bottom last week. The extent of the selling on the first pullback will tell us more.

Crude oil has also rebounded sharply, as the December contract closed last week $8 above the lows. As discussed previously, crude oil often leads the S&P 500 and its tracking ETF, the Spyder Trust (SPY). The weekly volume pattern in crude oil is consistent with the formation of an intermediate-term low, which if confirmed should be a positive for stocks as well.

Therefore, a pullback in the United States Oil Fund (USO), a leading crude oil ETF, as well as in two select energy stocks, should provide a good entry point on the long side where the risk can be well controlled.

chart
Click to Enlarge

Chart Analysis: The weekly chart of the December crude oil futures contract shows that it formed lower lows, line b, last week. There is initial resistance now in the $85 area with major resistance in the $90-$91 area, line a.

  • Volume was strong last week and the on-balance volume (OBV) has risen sharply above its weighted moving average (WMA)
  • The bullish divergence in the OBV, line c, is positive, as it suggests there were fewer sellers at last week’s lows than there were in August
  • There is initial support for crude oil in the $83.50 area with stronger support now at $82

The United States Oil Fund (USO) is the most liquid of all oil ETFs. The fund peaked in early May at $45.60, and with Monday’s higher close, it is still 27% below its 2011 highs. USO is already back to first chart resistance in the $34-$35 area.

  • The 38.2% Fibonacci retracement resistance is at $35.45 with the 50% resistance level at $37.30
  • The daily OBV has also formed a positive divergence, line f, as while USO formed lower lows, the OBV formed higher lows
  • To confirm the bullish divergence, the OBV needs to move through resistance at line e
  • As shown on Friday, the weekly chart also shows both a short- and longer-term bullish divergence that suggests an important low is forming
  • There is first support in the $32 area with stronger support at $30.50-$31

NEXT: 2 Oil Stocks to Monitor Closely