Let's talk about crude oil and the United States Oil (USO) exchange-traded fund.
The crude chart will be more accurate for my timing work, and I will give you some parameters in the USO ETF as far as the price work is concerned for your possible trading entries. The daily trend is still down here as the price pattern is currently one of lower lows and lower highs. Price is also below the 200- and 50-day simple moving averages and the May 13 exponential moving averages on the daily chart are still suggesting that the bears are in control. We are in the position, however, to see a bit of a countertrend rally in this one due to a few factors. First Crude has extended more than 1.272 of it's prior swing up, along with the fact that I have some Fibonacci timing parameters illustrated on the daily crude oil chart. These cycles come in between Oct. 29-31.
First let's talk about Fibonacci price extensions. When a market extends 1.272 or more of it's prior move, I tell my traders to tighten up stops since many moves terminate at extensions of prior swings, if only temporarily. A good example of this was when Apple (AAPL) extended beyond the 1.272 extension (675.37) of the April 2012 high to the May 2012 low into the September highs. This did not guarantee a corrective decline, but it did suggest that it was vulnerable and in the position for one to occur.
As far as Fibonacci timing is concerned, when I see a clustering of time cycles, we typically look for a reversal of whatever the market is doing as we move into the time cycle window. Since crude oil has been trading down into this window, the odds increase for a corrective rally to develop.
So what is the plan?
First, if you are a seasoned countertrend trader, you can attempt to take advantage of any signals suggesting such a rally may commence. If you are a trend trader, however, you should let the market correct into one of the key resistance decisions in the USO and then look for a sell trigger on a failure to clear one of these zones.
My plan is to wait for the correction and time a new short entry above the market. Key resistance that I have my eye on comes in at the 33.03 to 33.55 area. This zone includes a 0.50% and 0.618% retracement along with two 100% projections of prior rally swings. Note that the last two swings up on this USO chart were almost equal. That is how a prior sell setup was identified in this market up at the 34.72 area. If the sell setup scenario does start to play out, my initial downside target will be defined by running a 1.272 extension of the prior swing into the high. I will be able to update this target in Columnist Conversation if this happens.