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Despite Current Crude Oil Weakness, Still Prefer UWTI Over DWTI

|Includes: DWTI, VelocityShares 3x Long Crude Oil ETN (UWTI)

The above daily crude oil chart was posted by David Becker in a technical analysis article posted on FXEMPIRE, click here. In the article they mention the next support is $48.50. Is this a valid price target? Well, if you look to the early February 2015 rally, you will see that August Crude Oil stopped rallying then when it hit $59.17 on February 3rd. Then it dropped to as low as $48.71 on March 18th, a drop of $10.47 (17.7%). Next we topped out at $64.12 on May 6th, and if we fall a similar 17.7%, we would bottom $11.35 lower, or $52.77. To me, $52.77 is a more reasonable target than $48.50.

On Thursday, July 2nd, August Crude Oil hit a low of $56.50 which happens to be just one penny below the $56.51 low that July Crude Oil hit on May 28th. However, on Friday, July 3rd, although most markets were closed, crude oil traded until 1:00 p.m. EST on the Globex, and closed just off the daily low of $55.42. Many factors contributed to the weakness, the Greek vote on Sunday, the small increase in the rig count, and a bearish inventory report on Wednesday. Counting Friday, August Crude Oil has traded 8 days in the current downtrend, and a typical count is 9 to 12 days. I do expect for a bounce soon, but we could slip early next week first. Due to the Greece vote, I took profits in the triple leveraged Crude Oil ETF (NYSEARCA:UWTI) on Thursday's early strength and have stayed out of the market since.

I am looking for no more than a 7% drop in crude oil, lower than we saw on Thursday when UWTI was still trading. Being triple leveraged that would translate to a 21% drop in UWTI from $2.80 down to as low as $2.21. Here is a daily chart of UWTI:

We could bounce from $2.60 and $2.40, even if we ultimately see $2.20 and again, I still want to play UWTI over DWTI, as once we bottom, we should eventually work our way back to the $65 to $70 area in crude oil, which is 15% to 24% higher than Thursday's lows. Adding 45% to 72% to the $2.80 price, UWTI could rally to $4 to $4.80. Factoring in some slippage, you would still get $3.75 to $4.50 as a reasonable price target once crude oil bottoms.

For those who are long UWTI at $3, it might seem alarming to think UWTI could fall to $2.20, but if you realize that we have rallied in UWTI after every 20 cent move lower, one should be comforted. From the top, we first stopped at $3.40, and rallied back to $4. Next stop down was $3.20, which caused a rally back to over $3.70. Then we stopped twice at $3.00, rallying first to 3.80 and next to $3.75. Last Wednesday we fell to just above $2.80, and got a quick Thursday pop back to $3.02. With the weakness seen on Friday, I expect to see UWTI hit $2.60 on Monday but we could bounce from there. We are 8 days into the current downtrend in crude oil and most of the time we don't work lower than 10 days (2 weeks) at a time without showing some significant strength for at least a few days.

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Disclaimer:

The thoughts and opinions in this article, along with all STOCKTALK posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.