Better Late - USO Analysis for My Brother

Exactly one month ago (on Nov. 9), I had a quick Skype chat with my brother. Back then, Oil seemed to be going one way - UP. Tensions with Iran and some signs of life from the US economy sent oil prices soaring.
On our chat, my brother told me he was looking to take advantage of rising oil prices and invest in the USO ETF. I agreed that in the long run, oil prices will continue to climb higher. But my advice to my brother on our chat was:


[11/9/2011 10:55:24 AM] Roy : I think this is a very bad time to buy oil right now
[11/9/2011 10:55:32 AM] Roy : I can tell you that much
[11/9/2011 10:56:19 AM] Roy : I think at least some of the rise in oil prices is due to news from Iran
[11/9/2011 10:56:59 AM] Roy : but technically, this is a very RISKY place to buy oil
[11/9/2011 10:57:11 AM] Roy : and very little potential reward


I was in the middle of work, so our chat was cut short. I promised my brother I will give him a better explanation to support my view. Well.....I've been kind of busy so I'm just getting around to it today. Better late....so here's the explanation:
On November 9th, USO was on a thirty-seven day rally. During that time it went up over 27%. Despite the seemingly unstoppable climb there was a big problem on the chart. The risk/reward ratio was all skewed.
The closing price on Nov. 9 was exactly $37.00 but it was heading straight into a supply (resistance) zone at $39.22. This meant that the potential reward was two dollars and twenty two cents or 6%. But what was the risk? The way I saw it then, the real support for the price was way back at $29.10 or more than 21% below the Nov 9 closing price. So the risk/reward ratio in dollars was about 8 to 2 - which means you would have been risking $8 to gain $2 - terrible odds.
In the month since I chatted with my brother, USO has hit the supply area and pulled back somewhat. That's not to say that it cannot or will not break above $39 - it may very well do that. But if it does, a much lower risk entry would be on a pullback to the $39 area with a tight stop right below to contain risk.


Here's what it looks like on the chart (Click to see bigger image):

Can You Feel the (volatility) Squeeze?

Over the past five days, USD/JPY has been trading in a very narrow range - setting up a nice volatility squeeze. The Bollinger Bands on the 4HR and 1HR are getting increasingly tighter as the stalemate between the two currencies lingers, waiting to be resolved one way or another.

It's hard to tell which way the tie will break. On the one hand, the Yen is strong and seems to somehow keep getting stronger. On the other hand, the pair is deep within intervention territory and the BOJ keeps signaling more intervention, despite previous failed attempts, is on the table.

From a trade perspective, the plan is simple - set the risk of going long at around 76.30 where current support (and latest intervention level) still holds and go long. Or, if the price breaks below this level, wait for a pullback to what should now act as resistance, and short with a very well defined risk

Commitment of Traders (COT) Reports - 08/02/2011

Here are the COT net positions as of Aug. 02. You can see that even pre-S&P rating cut which happened on Friday, the USD is seriously losing steam. This means that the likely scenario in the chaos that we'll be facing in the next few weeks, will see the greenback losing more grounds to the CHF, and JPY.

 

Commitment of Traders (COT) Reports - 07/12/2011

It's actually been months since my last post. Although I update my own charts every week, I haven't found the energy or the time needed to upload them. However since I can see that people still visit this blog, and I hope they do because they find the data useful, I feel more motivated to keep it up to date.

So, here are the COT reports released yesterday, July 15th, containing data as of July 12th.

Ashraf Laidi

A couple of weeks ago I was walking back to my office after having lunch. Right on the corner of Wall St and Broad (across the street from the NYSE) I saw a man I immediately recognized. It was no other than Ashraf Laidi, Forex Guru per excellence. I have been following Ashraf's blog and countless tweets and TV/Web appearances for a couple of years now and I always find them insightful and educational. So as you can imagine I was quite happy to run into him on (quite literally) "The Street".

I rudely interrupted him in the middle of a phone conversation to shake his hand and say hello. Mr. Laidi was kind enough to invite me to sit for a coffee at a Starbucks near by and I, of course, said yes. During the next 30 minutes we talked about so many different topics and he told me about his new venture and ideas about the market.

Despite being 100% technical trader, as he himself told me, Mr. Laidi's is probably most known for his unique Inter Market analysis in which he uses intricate market relations to predict price trends in specific markets.

If you haven't checked out his site or tweeter page you certainly should.
Thanks Ashraf for being generous with your time and entertaining my questions!
Roy

Commitment of Traders (COT) Reports - 03/22/2011

After missing a couple of reports due to traveling, it's time to catch up. A lot has happened over the last 3-4 weeks, most notably the persistent unrest in the middle east and North Africa -particularly in Libya - and, of course, earth quake in Japan and the nuclear crisis that ensued. Through this bumpy ride, markets remained in favor of risk and the US stock market was able to maintain its multi-month highs as yields on US treasuries began to creep up again. However, the most recent COT reports signal a mood swing may already be in play.

Of the nine reports we look at, the S&P 500 E-minis report provides the most ominous reading of all. After a sharp spike in net positive position last week, we now can see a huge swing in non-commercial positions to the negative side. Combined with a smaller net-short position in Ten Year Notes and a higher net-positive position in JPY, these reports suggest a risk aversion mood is setting in.

Click on the images below to view the full size image....

Commitment of Traders (COT) Reports - 03/08/2011

COT reports (net positions) for March 08, 2011