TomAspray's  Instablog

Send Message
Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
My company:
Tutor Your Trade
My blog:
Charts in Play
My book:
Bi-Weekly Trading Lessons eLetter
  • Has Crude Oil Finally Bottomed? 0 comments
    Oct 11, 2011 11:03 AM | about stocks: USO, NE, SUN

    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.

    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

    Click to Enlarge

    Noble Corp. (NE) is a $7.8 billion offshore oil drilling contractor that hit a low last week of $27.33, which was just below the August low of $27.68. The daily chart shows a potential double-bottom formation, line a.

    • There is next resistance for NE at $31.50-$32.50 with much stronger resistance in the $35 area. This corresponds to the 38.2% retracement resistance from the March highs at $46.72
    • In the $37 area, there is more important chart resistance, as well as the 50% resistance level
    • The OBV has held well above the August lows, line c, which is a positive sign. A strong move above the downtrend, line b, and the previous peak, will confirm that a low is in place
    • There is support on the daily chart in the $29-$29.60 area

    Sunoco Inc. (SUN) is a $4 billion oil and gas refining company that currently yields 1.8%. It made a low last week of $28.79, which was well above the August low of $27.36.

    • The volume at last week’s lows was much less than what occurred in August (see circles)
    • The daily OBV is still just barely below its weighted moving average, but it did hold above the August lows. The daily OBV needs to move through resistance at line f to complete its bottom formation
    • The weekly OBV (not shown) has been acting stronger than prices
    • SUN is already quite close to next strong resistance in the $35 area with further resistance at $36.80-$38.20
    • Short-term support stands at $32.20-$32.60 and then at $31

    What It Means: The positive weekly divergence in the OBV for crude oil does suggest that a major bottom is being formed. To confirm the divergence, the OBV needs to move above its previous high, which is measured using the same rules I discussed in the most recent Trading Lesson (see “Accurately Analyzing RSI Divergences”). 

    Once USO, NE, and SUN have lower daily closes, we should see a 38.2%-50% pullback that will set up a good buying opportunity.

    How to Profit: For the United States Oil Fund (USO), go long at $31.68 with a stop at $28.77 (risk of approx. 9.1%).

    For Noble Corp (NE), go long at $29.56 with a stop at $27.08 (risk of approx. 8.4%).

    For Sunoco Inc. (SUN), go long at $31.74 with a stop at $28.59 (risk of approx. 9.9%).

    Stocks: USO, NE, SUN
Back To TomAspray's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.