Thursday, January 15, 2009

Oil ETF finds support at 20-day MA

The PowerShares DB Crude Oil Double Long ETN (DXO) has been ignoring recent weakness in the price of oil and has firmly traded at is 20-day MA for the past 4 days. Volume has been heavy and with the Bollinger bands tightening the likelihood of a sharp move (higher) increases every day the 20-day MA holds as support. Yesterday's bullish hammer keeps things interesting and a volume move past $3.00 would set oil bulls alight.

The bullishness runs in contrast to the United States Oil Fund (USO) which drifted below its 20-day MA but is finding support at $30 - which looks good based on a similar defence at the end of December. If there is a black mark it's that volume accumulation needs to swing higher because the trend is all distribution at the moment.

The final case for bulls comes from the PowerShares DB Crude Oil Double Short ETN (DTO). If this isn't a double top I would eat my hat (if I had one!). Inverse hammer bang on resistance from December lows, lows which the DXO never got close to testing. Note bearish divergence in the MACD and stochastics (to a lesser degree). Compare volume from the start of November to now and you can see the DTO is moving on fumes.

The set up looks bullish, but ironically the best opportunity may lie with the USO over the DXO. A push from $31.23 to $40 in the USO has a potential 28% return compared to a DXO push from $2.98 to $4.00 and 34% return. A stop for the DXO would go on a loss of the 20-day MA (say $2.69) for a 9.7% risk compared to a stop placed below the lows of the late December bull hammer at $28.89, for a 7.4% risk. This gives a risk:reward of 3.78 for the USO play compared to the 3.50 of the DXO; but the USO play has a little extra downside protection and potentially less volatility.

On Zignals I have archived a 6-month YourCall for USO available for all to see by registering for free at Zignals. Go to Charts - left slider menu / YourCall - Statistics and add your opinion today.

In 6-months time we will see who made the best call.

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website