The Oil Fund Looks Too Slippery

 | Jul 15, 2014 | 12:10 PM EDT
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Right now, there is simply nothing doing on the long side. Normally I can find something on my breakout scans worth pursuing. If equities are down, then maybe something metals-related. If metals are lower, then maybe some bond-oriented or yield-oriented names. At the very least, maybe a few old-school Dow 30 names will pop up.

But today? Nothing. I could argue Cisco Systems (CSCO) again, but I was just down that road a few days ago. Banks don't look too bad here, but I want "looks good," not "doesn't look too bad." 

One area which clearly looks no good is oil. Looking at the daily chart, it is clear that the United States Oil Fund (USO) is getting down to oversold momentum levels where buyers have bounced us before. The challenge here is that the USO was trading at or slightly above price support levels the last two times the commodities channel index (CCI) has gone under -100. Also, the relative strength index (RSI) is making a new low for the year in front of price making a new low, and the money-flow index (MFI) is showing that money flow has also lost support.

USO Daily

We may see a bounce soon, but it may still be a few days away, and it is likely to come from the $35 handle rather than a $36 handle. Any bounce into the $38 area looks like a sell and possible short. Also, if we see USO bounce back to $37 but get rejected, the fall may be down to the $34.75-$35 area, as a bounce, even a small one, could work off more of the oversold reading than the bulls would like in the short term.

For those who want to blame oil's fall on the dollar, a look at the correlation between USO and the PowerShares DB US Dollar Index Bullish (UUP) makes it clear that the correlation is spurious. While the correlation has times of being strongly inverse, we haven't seen it during the recent pullback in USO. In fact, since March, the correlation has fluctuated from strongly negative to strongly positive in several week cycles. I don't believe there is anything there to trade from at the moment. Momentum and price seem to be the most influential factors, as even moving-average crossovers have become too common. This could easily and more aggressively spill over into energy names, so use some caution here.

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