Black Gold (i.e., Crude Oil using the ETF symbol USO) extended its gains today and moved through the resistance area shown in the prior letter. This has been a large move in a relatively short amount of time. What can stop it?
Moving too far too fast will typically result in prices pulling back especially if prices move straight up. If USO gaps higher at the open, I think that odds are high that sellers will take control.
If that gap higher does occur, my plan will be to short the 3x leveraged Crude Oil ETF symbol UWTI when a confirming intra-day price pattern forms. That may be set up in two or 30 minutes. Or it may not at all set up and prices continue higher. For now, it's a thought and will be my focus at that time. We'll also look at what to monitor further out.
The broader markets had another “okay day.” It was a relatively a narrow range day, but that seems like that has become the norm these days. Most sectors ended green, most noteworthy was the continued move higher in Black Gold — referring to Crude Oil.
Of the indices show above, the Nasdaq 100 ETF QQQ was positive on the day, but it barely overcame the prior day's high. The relative weakness was in a sector that has led the move higher. That being the Internet Index symbol FDN. Watch that one today. If it moves lower, it just might bring some selling into the other indices.
There has been little change to the trends and breadth. Most relevant was the hourly trend change from sideways to up in the Transportation sector ETF symbol IYT. That strength came in at a time when energy prices were surging higher.
How does that make sense — energy costs rising and transportation stocks moving higher as well?
It suggests that the demand for oil probably means economic strength. Hence a demand for companies that move goods, information and people.
I am not an economist; however, I follow inter-market relationships to guide what is happening. And the why and where that is likely to attract money into or out of. We'll take this thinking a little further in a minute.
Before moving on a mention about sentiment. It is at a bearish level (options traders buying many more calls (bullsh bets) than puts (bearish bets)), yet breadth is still bullish. Not until both are at bearish extremes will it be a concern.
So can the typically wrong-way options traders have it right this time? They just might with breadth saying that there is “gas left in the tank” to move higher. I am skeptical of how much higher with sentiment bearish, but will go with that whatever happens. No choice of course.
“Black Gold” Higher Again
USO, the Crude Oil ETF, moved above the price resistance that was to the left and its 50- and 200-period moving averages. This suggesting a move to the next resistance above.
If you've been a reader, I told you that big money eyes were on oil before the turn. Big money has been made during this move from the low, but the easy money has been had. My focus to short UWTI (mentioned above) is not to suggest that the move in completely over. But I do think there will be selling if prices gap higher at the open.
The Energy Sector ETF symbol XLE broke above its range today on increased volume. The stocks in the sector are moving higher with increased momentum now. That was not the case when oil first started its move.
In my July 31st letter I said, ” I would not expect a breakout of the range and a momentum move higher in the near term. But there are opportunities in this sector.” That was spot-on at the time. Now that prices have broken out, we should see energy stocks and this ETF continue the move. BTW, CHK has done very well since mentioned.
The Dollar and Oil
In that July 31st letter, I also showed you the Dollar versus USO and their inverse relationship. That was part of my bias why oil would turn. The continued move lower that started then has continued, and so USO higher.
Above is the Dollar index (in the prior letter I used the ETF symbol UUP) that is nearing first price support. Take note of that level (which in UUP is in the $24.20 area, which is not far away). The Dollar at that support level should result in USO stalling and potentially moving lower. That is a short-term view. We will see to what extent this unfolds.
Black Gold – What About the Yellow Gold?
Above is the Gold ETF symbol GLD. The two charts are the monthly and weekly time frames. This is a tough picture right now to trade. Here's why.
The turn and move higher has broken the downtrend in both time frames and is still intact in both. While into resistance that can be seen on the monthly, it's relatively wide. So prices could move higher — maybe to the top of the resistance area before a stall. There's no way to know.
While into that resistance, the price action on the weekly time frame is very constructive. That suggesting prices are likely to move higher, but how high? As I said, maybe to the top of the resistance area. That being said, the lower support marked on the weekly time frame should not be violated.
A retracement into the green rectangle would be okay and could be the area to enter with a confirming setup.
Ideally, GLD continues the sideways price action and then breaks out. The green moving average is the 10-period moving average. Why a 10? Because it equals the 50-period moving average on the daily time frame.
As I said, a tough picture or combination of multiple time frames or not easy at this time.
I hope you've profited for our letters and have learned a lot. Dan's options plays and commentary have been great, so if you've missed them, go back and read them.
That is for today. Happy Friday and a Great weekend ahead! Until next week fellow investors and traders…
All the best,
Founder of The Pristine Method of Trading