All Eyes on Oil

Action:

As the title suggests, the key to the markets rallying rest on Oil. Infact, ever since OIL surpassed $125, market and OIL have had a neat inverse correlation. No wonder, the question to be answered is when will Oil Crack?

The USO charts (an ETF which reflects OIL: not included here) is consolidating in a sideway flag pattern. Such consolidation is usually not healthy consolidation. We prefer a more downtrending consolidation in order for a leg up. That being said, OIL could ofcourse go higher.

The three charts above are XOM(Exxon mobil), COP(Conocco Phillips) and CVS (Chevron) - three huge oil companies. We look at the clues these charts provide towards the possible direction of oil and the turn date time, since USO is essentially a parallel channel and doesn't provide many clues as to the timing.

We note many bearish indicators on all these charts:-
1. All the charts have formed the 'M' pattern. The 'A' is in the formation. The MA pattern is typically bearish, taking the stock much lower than the neckline.

2. XOM's bottom line has a negative divergence on the MACD, which suggests weakness in the triangle.

3. A similar bearish divergence is seen in COP's chart, every higher high has had a succeedingly lower MACD.

Now the deliverance day on these stocks will come prior to the date the triangle sides meet. We believe we will know by July 10th, since typically the time taken for the formation of the pattern A is lesser than the time for M.

Guess:
We favour the downside in OIL, and plan to take advantage using DTO or DUG. As an indicator, we want XOM to close below the key $85 level for a play on DUG or below $106 on the USO.
Oil is a heavily watched commodity and a very crowded trade. It is prudent to take small positions, since it could all go awry real quick.