Chart of the Day: Crude (USO) Hits Long-Term Support at US$47.50

It's amazing when the market seems to make sense, as we think it does today with oil, at least according to the chart below. As we noted yesterday, a 40% correction in oil--quite a common occurrence in long-term bull markets--would put the crude price back to around $45, post haste.

It's easier to understand a thing when you see it, sometimes. So with the help of our friends at http://www.decisionpoint.com/ , we decided to construct a chart of crude oil back to its 1998 low and see what we could see. You can see it below. And as you can see, it's fascinating. What does it tell us?

• The red trend line connects crude's 1998 low with the pre-Iraq low and proceeds on out to $30. That's where you might expect oil to settle in a world without a steep geopolitical premium, and assuming that global production has not peaked out just as demand is growing. That's one scenario.
• The green line connects the '98 low with subsequent lows, post-Iraq invasion of 2003. This date matters because it reflects the increased geopolitical risk in the price of oil, not only from Iraq, but from Iran, Russia, and Venezuela.

What's most fascinating about the chart is that green line ends at nearly exactly where USO (the ETF that tracks crude prices) closed after Tuesday trading, right around $47.50. USO's price, however, is considerably below the February crude oil contract, which was trading at an 18-month low of $55.65 this morning. This prompts the question: has the ETF fallend more than the crude price because the ETF was overcooked with speculative money?

Or...has the ETF more accuately forecast crude's natural level of trading support after a customary 40% decline from it's 2006 high? Forty percent of $78 is $31, and $78 minus $31 is...$47. Hmm. Of course, corrections can overshoot to the downside too, just as bull markets overshoot to the upside. We'll be keeping our eye on the chart. But USO looks look a buy to us.

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• None Found