U.S. Oeil Fund ETF (USO)
The U.S. Oil Fund ETF attempts to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. I was unable to find a chart that I could annotate and post of the commodity itself, so this will act as a proxy. Addressing the downside risk first, the longer term triangle bearish pattern suggests the possibility of a 50% retracement in the spot price of crude. The realization of this scenario would price crude around $25 a barrel. Technical analysis confirms that my previous downside target of crude under $30 is in fact possible. However, when I made this prediction, crude had not bottomed and the economy was not improving. Commodity prices are more supply and demand sensitive than equities in regards to the physical assets. The pricing of equities is done on a supply and demand basis, but here I’m referring to the availability or use of the physical commodity. This downside price target was plausible, and even likely if the economy would have stagnated in March. The economic improvements have greatly reduced this possibility, but to respect technical analysis, we should not completely eliminate the chance of this downside price target being realized.
The upside potential, on the other hand, looks very promising. Technically, the shorter term pennant bullish pattern suggests the possibility of a 10% increase in the spot price of crude. The realization of this scenario would price crude around $60 a barrel. This short term price target seems very probably as we head into the summer driving season and approach the start of hurricane season. Another pattern found on this chart is the cup with a handle pattern. This pattern is known as a bullish continuation pattern. The cup is not as clear in this chart because it appears a little more “V” shaped than the actual spot price of crude does. The handle is the consolidation that has occurred after crude reached upside resistance around $55 a barrel. The handle typically represents the final consolidation/ pullback before the breakout. The smaller the retracement is, the more bullish the formation and significant the breakout. Based on this pattern, the longer term upside potential is an approximate 40% increase in the spot price of crude oil. This translates to about $75 a barrel, which has been my end of the year price target on crude for about a month now. The volume on the breakout should increase substantially as crude trades above the handle’s resistance. A dramatic increase in volume will be the final confirmation the breakout is underway.
This Bloomberg article supports my assessment on crude.