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Signal Divergence Between USO and WTI

Margin hikes and increasing oil inventories in the US have impeded the ability of crude oil to move higher in recent trade. TheLFB client notes have called for consolidation at support above 95.00 on West Texas Intermediate (NYSE:WTI) and to expect a break higher in crude prices.

TheLFB market alert service recently highlighted the fact that long-WTI positions would need to be closed if support at 101.50 was broken. The closing of long positions turned into a signal to potentially sell WTI with a break of 100.00, targeting 97.90. The trade signal was in-line with global equity and risk markets finding sellers.

The correlated WTI selling move in USO (38.50), the exchange traded fund that tracks crude oil movement, took longer to form. The potential was not however actionable for clients after USO opened at 38.70; sixty points lower than the previous close, and missed the entry area around 38.90. That is the frustration that 9-5 equity and ETF traders face most days when momentum hits the global markets.

Invariably, big moves in Asia and Europe are seen as gaps in opening US prices that traders are unable to access. The WTI moves were accessible overnight for those who trade currencies, as the Canadian dollar lost ground to the US dollar, in-line with WTI moves. Buying the US dollar and selling the Canadian dollar is a simple process of placing a buy order on USD/CAD in the 24-hour forex market, and then closing that same position in a similar way that equity trades would be bought and sold.

Sentiment towards WTI trade is mixed after recent tests of support held. Price action favors a bounce off support, only because of the severity of the recent drops that seems to have got ahead of themselves. Caution is required in being in the crude oil markets while fair value is found between institutions and speculators. A safer way to trade oil movement may be via a 24-hour currency trade that will at least allow instant access to react to global sentiment swings.

Price Action:
There was strong buying activity at 97.00 on WTI in early May, which is a strong area of support that will be carefully monitored. A break on WTI of that area will draw in a trade signal on USO from 37.80 that will initially target 37.50 and then 35.90. However, sell signals have not yet been confirmed, and patience is key in letting this potential build.

The next upside resistance area, where price action potentially reverses previous trade direction, is at 100.80 on WTI, and at 40.80 on USO. These area will be closely monitored and market alerts sent to subscribers as things unfold.

The daily trading range on WTI is $2.70, which is above the historical norm and indicates solid speculative interest. The 100-day Simple Moving Average (NYSE:SMA) is @ 98.35. The 50-day SMA is @ 106.00. WTI has a 36-month 75% correlation to S&P moves, and a 90% correlation to the euro (Eur/Usd).

The detail below will help guide traders with analysis on intra-day price movement, trend, and momentum. Clients will note how regularly the Swing Point and Support or Resistance areas below are used each day.

May 12 11 TheLFB Review USO
Content taken from TheLFB Trade Plans

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