With all the talk of oil and its rapid increase in price. Let’s explore the technical side of it by dissecting the USO chart – and ETF that’s value is tied to the price of oil.

Here is our first chart of oil in which we are drawing a trend line for from January 2007 and connecting it with the next pullback in oil during May 2007. Everything looks calm and collected – a nice and steady increase in price.

The next chart shows more aggressiveness by the buyers to move the stock, and the trend line gets steeper from the middle of August 2007 through the beginning of February 2008. Still at this point, oil was definitely on the radar screen and being monitored regularly, but it wasn’t being nearly as talked about consistently as it would in future periods.

Our next chart shows the trend getting even steeper. This period lasts from the beginning of February 2008 all the way through the beginning of May 2008. What these charts show is that every time there is a significant pullback, buyers use it as an opportunity to add even more to their current positions in a more aggressive manner than in previous pullbacks. New buyers are also entering the mix, and the entire stock is becoming on the verge or irrational.

Finally the last chart shows oil as parabolic, a clear sign of a bubble being formed. This is about as straight up as you can get in a stock. Buyers are becoming too aggressive, and committing captial as fast as they can, and when all this euphoria is priced into the stock, then “boom-goes-the –dynamite” oil will rapidly drop in price.

This doesn’t mean that this day of reckoning is imminent or that we are destined to see a strong pull back in the short term. But rather it is a mere observation of what should eventually happen in this bubble-like atmosphere just as it has done in every other bubble market of time’s past. Just don’t be the one that gets sucked in on this rally’s last breath.

Assuming that we get the pullback in the near term, don’t expect oil’s bulls just to give up right away, they will be propelled to go long once again as they have done previously, but the buying power will not be there, and instead of racing on to new highs, a “lower-high” will be created (a term which is discussed about in our glossary) and that will be your sell signal for all you shorts out there (we being one of them) waiting for the right moment to starting positions to the short-side.