Oil On The Verge Of A Breakout

06/08/07 09:30:57 AM

by Arthur Hill

The US Oil Fund ETF (USO) surged off support over the last few days, and the exchange traded fund is on the verge of a breakout that would signal a continuation of the prior advance.

Security: USO
Position: Hold

Before moving to the potentially bullish setup, let's get some perspective with the weekly chart (Figure 1) and the current bearish pattern. The US Oil Fund ETF (USO) broke support at 60 with a sharp decline in 2006 and then rallied back above 50 in 2007. The rally formed a rising wedge and the exchange traded fund (ETF) broke a rising wedge support with a decline in early May. This break is bearish and it has yet to be proven otherwise. As long as this break remains, a test of the January lows is in order.

FIGURE 1: USO, WEEKLY. The USO broke support at 60 with a sharp decline in 2006 and then rallied back above 50 in 2007.

Graphic provided by: MetaStock.

Despite that bearish prognosis, a bullish pattern is emerging on the daily charts, and this could negate the weekly chart pattern (Figure 2). For reference, the gray trendlines show the rising wedge on the weekly chart. The ETF found support around 47.50 in May and surged to resistance at 51 over the last few days. This surge reinforces support and we must now pay heed to the falling price channel. The decline also retraced 62% of the prior advance. Both the pattern and the retracement are typical for corrections, and we should be on guard for a breakout.

FIGURE 2: USO, DAILY. A bullish pattern in emerging on the daily chart and this could negate the weekly chart pattern.

Graphic provided by: MetaStock.

USO broke the upper channel trendline and is on the verge of a resistance break at 51. A close above this level would be bullish and target a move to the upper 50s. This target stems from a measured move technique. The first advance was 11 points (43 to 54) and a similar advance from the May lows would extend to around 59 (48 + 11 = 59). Should the ETF fail at resistance, look for a move below key support to trigger a bearish signal and target a move toward support around 43.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Oil On The Verge Of A Breakout

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