A Recovery Bubbling in Crude

Crude oil has taken a major pounding in the last two weeks. Two massive selling waves, one last Monday and the second last Wednesday, dropped U.S. Oil (USO) by more than 7%, leaving behind an important near-term top. The USO topped out at its declining 200-day moving average, and it has very quickly given back much of its big bull run off the late-June spike lows. At this morning's lows, the USO had fallen just over 10%, retracing half of the rally off the June lows in the process. This area also contains a breakout gap that had been left behind back on Aug. 3. The fund began the second leg of the surge from here, eventually moving up to the $37 area.

USO -- Daily Source: TradeStation View Chart » View in New Window »

I believe the USO could mount a recovery rally from the $33 area. Crude is deeply damaged from last week's flush, and it hasn't become oversold at this point, but a rally off the 50% retracement area is likely. I am a light USO buyer today at just above $33. If the fund can hold this support, I expect a recovery rally back up to the $35 area. That makes this a fairly low-risk long-side play.

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