Charting Analysis - The Next Move in Oil Prices

The price of oil has recently experienced a brief respite from its almost 2 year long rout.  Market pundits have (falsely, I believe) correlated this pause with the recent gains in the broader indices.  However, technical trading patterns would suggest that bears may be returning to feast on the old-world energy source.

To better understand the logic, let's look at the chart of USO (Oil's primary ETF):

First, let's breakdown what's currently happening:

1.  The price of USO has reverted back up to its 50-day moving average which is acting as a resistance level.
2. It failed to break through the resistance and has moved lower... albeit only slightly lower.
3. When prices move between converging moving averages, like we're seeing here, they tend to consolidate with each average acting as support and resistance... when prices eventually move outside of the averages, they will tend to breakout

As traders looking to exploit option leverage, we always want to be in positions that are breaking out.  Breakout patterns can be dramatic and that's where exponential profits are generated.  Let's examine last October's move in prices for an example of this:

1. The biggest factor I look for in finding breakout patterns is the divergence of the short-term moving average from the long-term moving average
2. Here, we see the USO ETF breaking below both averages. The averages begin to diverge from each other and the subsequent move is dramatic.

Currently, the USO ETF is in a bearish consolidation pattern.  However, if the price breaks out below the moving averages and the 20-day begins to diverge away from the 50-day, we could very well be looking at yet another leg down in the price of crude.