Oil Slick – Is the Worst Over?
As good as January was for the oils, February has been equally as bad. Corrections like this always bring on the "is the run over" questions, so lets take a look at what the charts are telling us to avoid any irrational conclusions. I’ve marked up a few ETF charts that I think are good representatives of the oil industry.
Below are the Energy Ishares ETF (IYE) and the Oil Services Holders Trust (OIH). The thing that stands out to me the most is the consistent pattern over the past year or so. You see a very consistent trend of a sustained rise followed by a fairly sharp sell off to support (which has been close to the 50 day moving average, but drawing an upward trend line off the lows looks like a stronger area of support). The sell off portion of the pattern is what we’re seeing now. Based on the previous pattern it stands to reason that the bulk of the sell off is complete with the potential for further downside risk in oil related issues of 3 – 5%.
The Oil Services Holders Trust (OIH) is holding up much better and was able to find support at the 50 day moving average on Friday. Whether it can hold there is anyone’s guess, but considering the tremendous move over the past few months and recent selling pressure, it wouldn’t at all be surprising to see it break that support eventually and test that trend line around 125.
The Energy Ishares ETF (IYE) is exhibiting more technical damage. The selling volume overshadows buying volume and it remains submerged below support of the 50 day moving average. Expect to see some oversold buying very soon, but I think ultimately it tests that trend line around 86 – 87.
The market is currently pricing in rising inventories in oil and natural gas as well as decreasing demand for ’06. The wild card is really the Iran situation which could go either way at this point. Certainly, oil will rise quickly if it appears that the situation is getting messy. However, if Iran cooperates (that may be the first time that Iran and cooperates was used in the same sentence), keep an eye on those trend lines for support.
Filed under Industry Spotlight by Tate Dwinnell