Oil ETF Generates Sell Signal

United States Oil Fund (USO) generated a sell signal on Friday when the 20-EMA crossed down through the 50-EMA. This action took place a day after the price index broke down through the bottom of a triangle formation. A triangle formation is a continuation pattern, and this particular triangle had a slightly bullish bias because it was tilted slightly upward.

As a continuation pattern (a consolidating move that occurs prior to the resumption of a trend) this triangle also had bullish implications because it extended sideways off an advance from the March low. Primary evidence was bullish and it would be reasonable to expect the triangle to resolve upward. But it didn’t because USO is in a bear market (the 50-EMA is below the 200-EMA). Remember, no matter what the broader market is doing, each individual price index has it’s own bull or bear market depending on its own movement, and in the case of USO, bear market rules apply. This means that bullish setups are much less likely to deliver on their promise.

USO had a parabolic rise to a blowoff top near 120 in mid-2008. This was followed by a break down from the parabolic and a spectacular crash down to a low near 20 in February. This is fairly typical of the results following a parabolic rise. The next thing we should look for is a basing pattern that could extend over many years. This is where price trades in a sideways range, building a base from which the next big rally will emerge. Looking at historical prices and recent price action, my first guess at the range would be between about 20 and 40.

Bottom Line: A promising rally for USO has failed as prices broke down from a bullish triangle formation, the most likely cause being that USO is in a bear market. It is also in the recovery phase of a parabolic blowoff/crash, and this typically means that prices will run in an extended trading range. In the case of USO I estimate a range between 20 and 40.

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