Has The Oil Bubble Finally Burst?

Click the graph below for a larger image.

A few observations but first understand that this chart is for USO. Its movements tend to reflect the movement in the price of a barrel of oil but the absolute value is not the same. (USO is currently at 102/share and oil is around 126/barrel.)

1. Two long term bull trend lines (green and purple) remain intact, but the most recent bull trend (light blue) support has been significantly penetrated on strong volume.
2. The support of the 20 and 50 day moving averages has failed and price is now below them. The 50 in particular had been prviding strong support during the most recent rise. The 20 average is moving downward, the 50 day is rounding, but prices are well above the 200 day average.
3. This latest downward move was well predicted by a negative MACD divergence which I have indicated with black lines on the price and MACD chart. This divergence shows the move from the June 08 price peak to the July price peak was not confirmed by the action in MACD.
4. I have also shown with black lines the same type of negative divergence that occurred from early December 07 to early January 08. In that instance prices simply consolidated their previous gains until the mid February bull breakout which started the most current bull trend line.
5. We could be in a consolidation pattern again but notice that in the earlier divergence the 50 day moving average acted as support for the consolidation; in the current case it has been violated. Also notice that in the earlier divergence the volume was not unusual; in the current divergence we see volume starting to build in march 08 and very strong volume on the actual downtrend beginning in early July. Certainly the March to July volume appears speculative and not unlike volume patterns often associated with the final stages of a bubble (blow off tops).
6. The four light blue bars are Fibonacci retracement levels from the beginning of the most recent trend line (February 08) to the current high in July. Price is sitting at 102.38 as I type, hovering just above support at 100.17, the 38.2% Fibonacci retracement level. Should this support fail the next Fibonacci support is 94.30 with a bit of technical support above that provided by the mid April high of 95, indicated by the gray line. The support at 102.38 appears crucial for the bull case. If it gets taken out the 50 day moving average will have turned down as well and the 200 day will likely have gone flat. We would also likely see the 20 day average move below the 50 day which would be very bearish technically.
7. Points to watch on the way down: Notice how nicely the Fibonacci 61.8 % and mid March peak line up (another gray line.) That area should provide strong support. Finally notice how, should that fail, the Fibonacci 100% will likely be aligned with the 200 day average.
8. Short term upside resistance for USO appears to be around 110. That will be the bulls target to once again establish control.
   

So has the bubble burst?
Not yet. This chart is still a correction within a bull market but for the first time this year short term speculators will likely find the bear case (AGAIN I SAID SHORT TERM) at least as attractive as is the bull. For those keeping score a $90 on USO probably means a barrel price around $110 and a $70 USO probably puts a barrel around $86.

What about fundamentals? There has never been a fundamental case for the degree of oil price rise we have seen. The only fundamental driver, IMHO, has beet he decline in the value of the dollar and that would put a barrel at perhaps the 60-80 range. People who argue that supply and demand have driven the price are, again IMHO, really confused; they think the market is pricing in now the pressures that oil might feel in 10 or 20 years; markets don't act that way, they don't think THAT far ahead. People however sometimes do so I think its fair to argue that PERCEPTION of a fundamental issue (in this case supply/demand,the peak oil scenario) has powered some of the bubble.

Lately reality has been making a bit of a comeback perception-wise. Demand is showing much less acceleration, (and in some cases actually decreasing), supply has had positive news of late, and the Iraq and Iran outlooks are perceived to be becoming more stable. Some governments and companies are making more serious noises about conservation and alternative sourcing. What would be the last shoe to drop if you follow fundamentals? I think that would be a world tightening of interest rates as the fear of inflation increases. The US being in the worst financial shape will likely be the last to tighten, but tighten it will and then the fear of recession will be the final excuse from the fundamentalists for the bursting of the bubble which the charts are already suggesting.

Bottom line: I am not a fan of fundamentals but the perception of them is significantly improved compared to say, January. I had said all along oil at 60 before 200. I will now add that I think 40 is very possible.

UPDATE: In the 4 hours since I posted USO has now closed around 100. (See item 6 above.) Upside resistance is now around 107.50. I actually expected a reaction back up to the 110 area before additional damage was done.