Downleg in Oil - Market Analysis for Sep 19th, 2011

Nearby NYMEX crude oil finally proved the chart work correct as it plunged from the upper portion of its September congestion pattern (89.00-90.00) to the lower portion (86.00-84.00). The decline from last Thursday's lower recovery high at 90.15 into this morning's low at 84.93 has the look and structure of a completed downleg.

If accurate, this means that a period of upside backing and filling towards its key near-term breakdown area (86.50-87.50) could be in store in the upcoming hours. It is for this reason we exited our inverse (short) position in the ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO).

Apart from this shorter-term trading strategy and outlook, my longer-term work on NYMEX crude argues strongly that a counter-trend recovery period from the August 8 low at 75.71 ended at the September 13 high at 90.52 and that a new downleg has commenced that should revisit and likely break the August low.   ETF traders may want to keep an eye on the U.S. Oil Fund ETF (USO).