Update on Crude Oil - Intermediate Term Bottom is Likely In

Click on Chart to Enlarge

The chart above is of USO which is the main ETF used by equity investors to trade the oil market. The price of USO very closely follows the price of crude oil on a % basis though the actual price of USO and $/barrel crude are different.

The issue I wanted to raise today is a follow up to a post from last July that can be found at the link below.

http://stockmarketalchemy.blogspot.com/2008/07/update-on-oil-market-and-uso-chart.html

In that post I had stated that the % decline and rate of decline in oil had been greater than any correction in the bull market for the last couple years. These types of movements often reflect major trend shifts. This was at a time when most news and blogs, etc that I read were seeming to suggest that that decline was a good time to go long oil - good buying opportunity.

So now 6 months later, we are in the reverse position. The chart above shows USO with the % gain from low to high of every significant price advance so far since the top in oil. The advances are roughly 10%, 22%, 16%, 14%, 22%, and 40% for the most recent advance in the last week or so. Notice how the first 5 corrections, while not all the same %, were roughly in the 10-20% range with the average about 16%. Now suddenly, we see a 40% advance in the same amount of time that the other advances typcially took. As a rule of thumb, if you take the largest advance of several corrections (in this case 22%) and a new correction exceeds that amount by 25% then there is a good chance that a trend shift is occuring, especially if the rate of advance is more explosive than the others as is the case currently.

So a very aggressive trader could use the pullback today to buy USO or crude oil. Or you could wait for a break above the recent high and set a stop below the most recent swing low to that point.

I had posted about DBA the other day. The situation of the recent advance in the grains is similar to that of oil, though DBA is a little extended beyond a safe buy point right now from my perspective.

So just to think ahead, I don't really expect that this low in oil is a multi-year low, etc, but bear markets of these commodities typically have strong rallies of say 30-100% that can last several months before running out of steam.

Pete