I mentioned the developing wedge in both the SPX and crude oil in this morning’s macro wrap. Crude oil is especially interesting because the WTI contract has developed a long-term wedge, but the European Brent crude contract has a slightly different pattern, dominated by a very important short-term support line that has been tested on multiple occasions in May:
Today is basically the 5th test of that support level, and the more times a support or resistance level is tested, the weaker it gets. If that 101 level in Brent crude does break in the next week, I expect a much larger move lower from there.
There is no good, liquid ETF to play Brent crude, but the USO ETF is designed to follow the WTI front-month contract (and is poorly structure, so has a natural bleed to it as well). Brent and WTI have a 81% correlation over the last year. The 1 year chart of USO:
The 31 level in USO is the key area of support (trading around 33 right now). Here are a few structures that look interesting to play for a move back to the level (doing nothing myself):
Buy the June22nd expiry 32 / 31 put spread for $0.21. This is the trade that is in anticipation of an imminent break in support.
Sell the July 33 / 35 call spread at $0.75. This trade would fit a view that a rapid break lower is not necessarily imminent, but oil’s upside over the next couple months is capped, and a range trade continues.
I’m not going to initiate a new trade on USO today as I am already a bit exposed to that theme (namely, my FXC trade), but it’s an interesting setup regardless.