Crude Weakness Ahead?

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Includes: DIG, DTO, DUG, USO
by: Herman Hemati

Recently the EIA stated that U.S crude stockpiles dropped 8.4 million barrels last week. This surprise in inventory levels prompted a series of buying, thus sending prices as high as $72.50/BBL.

Even with the bullish news of stockpiles decreasing, I believe that the price of crude is at a short-term maximum. Any further price increase above $75/BBL for this commodity could greatly affect any recovery out of the recession.

During the past month crude prices have risen approx. 15%. Any attempt of breaking above the key resistance level of $75 has been diminished by the bears. The $75 barrier has proven to be a worthy price barrier for the price of crude, and I do not foresee crude breaking higher anytime soon.

Technical Analysis:

After analyzing the 3 month chart of United States Oil Fund (NYSEARCA:USO), I have noticed a bearish divergence forming within the MACD and RSI technical indicators.

For those not familiar with technical indicators, the RSI compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. After analyzing the indicator in conjunction with the security, I noticed a discrepancy in the trends.

The MACD is calculated by subtracting the 26-day exponential moving average from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. Source: Investopedia

As USO makes new highs, the value of the RSI/MACD makes lower highs. This is an excellent example of bearish divergence. Bearish divergence occurs when the security prices jumps to a new high, but the oscillator makes a lower high. When an oscillator displays the following pattern described above it means that there is more selling pressure as the price increases. 3 Mth Chart - USO

In the chart above I have identified trendline resistance and support levels. If the divergence above proves to be valid, USO could increase slightly before retracing to $34-$35 range by the end of next week.

Disclosure: At time written, author did not own any securities of USO, but looking to accumulate option puts in the near future.