As Gold Breaks, Will Crude Oil Follow?

From some perspectives, the biggest impact of the threat of Iranian war games in the Strait of Hormuz was to delay by a day a strong sell-off in crude oil. Shares of oil-related ETFs and ETNs like the ^USO^ and the ^OIL^ plunged in Wednesday’s trading, dropping by more than 5%.

The selling in both funds was severe enough to send both funds back into bear market territory where they have traded for most of the second half of 2011.

Oil was short-term oversold as recently as last week, as the commodity pulled back in the first few days of December. And in the context of the strong selling on Wednesday, the bounce at the beginning of the week appears to have been an abberation (note that both OIL and USO finished well off their highs on Tuesday).

In the short-term both OIL and USO are oversold. But neither is so oversold that they could not fall further, and traders interested in scaling back into these markets on the long side should keep that in mind.

Compared to equities-based exchange-traded funds, commodity-based funds and notes like OIL and USO tend to trend more readily. This means that, relative to equities ETFs, commodity funds and notes will become and remain oversold (or overbought) for longer periods of time.

Speaking of equity-based ETFs, both the ^OIH^ and the ^XLE^ are trading at oversold levels beneath the 200-day moving average. These equity funds are significantly more oversold than their commodity counterparts, though none of the funds or notes have yet reached the same oversold extremes that occurred during the last correction heading into the Thanksgiving holiday.

As of trading on Wednesday, both OIL and USO had short-term, positive edges of more than 1%. Positive edges in the Energy Select Sector SPDRS ETF are near 4% in the short-term.

The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of