(As published in Morningstar)

July 11, 2010: The oil sector exchange traded fund--USO-- had broken below its uptrend channel on the weekly chart indicating long term weakness.

And our profit and loss statement here:  Weekly profit and loss statement

USO Analysis:

USO had a massive fall  from $120 in August 2008 to  $22 in February 2009. Since February USO has moved up at a slow pace to peak at $42 in April. Now let us take a look at the chart below to analyze the price action.

USO began forming an uptrend channel marked by the yellow parallel lines. Notice that the lower line which was acting as support was broken in May. Prices then rallied but failed to go back into the channel. In fact the lower line which was support is now acting as resistance. The other bearish indicator is that prices are trading below the 30-week moving average and has stayed there for a few weeks.

The break below the uptrend channel shows weakness in USO. Also if one looks at the price action, from the peak of 2008 till date, the uptrend channel looks like a bear flag. A bear flag shows a rally in a bear market, before prices continue lower. We would wait for prices to rally and the commodity channel index to be overbought before taking a short position. For buy and sell areas on USO click the link above.

Always remember that technical analysis can be proven wrong and hence it's wise to minimize losses with stops.

Chart Analysis

USO Chart