United States Oil (USO)
(11/29/07)

Oil prices dropped recently, ostensibly on news that OPEC was stepping up production supply to the market.  The announcement coincided with a key Fibonacci retracement, from which a drop would also have been expected.  The fundamentals therefore have to be measured up against current speculative psychology in crude oil trading, and our research suggests the current pullback should only be temporary.   First, it isn't fundamentals that have taken prices to near $100/brl.  That comes primarily from bull market speculation.  Secondly, the U.S. Energy Information Agency's data shows supply shortfalls even with both OPEC and non-OPEC production increasing into 2008, another reason we believe that prices haven't likely topped as yet, even giving the fundamental argument some weight.   The USO ETF allows us to make a direct crude oil play on what ideally would be a fifth wave rally opportunity.

While our wave count gives high probability to USO's Wave (4) decline having bottomed at 71.09 on Wednesday, it's possible one further low might still remain at the 70 area.  There's some Fibonacci resistance at 73.55, and the stock stalled just underneath this in the morning's trading.  One thing to watch is how it behaves following the pullback that occurred after USO hit 73.32 this morning.  71.09 is key support to whether a Wave (4) low is in.  If the stock recovers above 75.10 and can hold above this level, then in should strengthen the case for a standing Wave (4) low, and a Wave (5) rally in progress.  A conservative entry may therefore want to await such a break.  A slightly riskier entry comes on a break of 73.55.  I'd suggest using 70 as a stop, or use a money stop, as preferred.  At 82.60, Waves (1) and (5) would be of equal length, so this would be a key upside target.  Waves (1) and (3) are related by .382, so a Wave (5) terminating at less than the 82 area would be less than ideal.  There is further potential to 86, and potentially 89.75, based on .618 relationships between all three impulse waves.   

Beyond December, immediate option months are January and April.  While this could in all likelihood be achieved by January, we're playing it a little safer using the April series.  The April 2008 $75 Call (symbol UNADW), was pricing at $5.20, with the Delta at 0.52.  

©Copyright 2007 Tony Carrion.  All content presented is the exclusive property of Market Harmonics. com, which is owned & operated by T. Carrion & Co., LLC, and may not be duplicated or distributed without the express written consent of the author.