The broader stock market’s washout selling price action over the past couple of trading days has brought about even more oversold readings in energy- and oil-related stocks. As a result, the Market Vectors Oil Services ETF (NYSEARCA:OIH) has reached long-term technical support and deeply oversold readings.
For active investors and traders, that spells very juicy opportunity in OIH.
It has been a well-defined one-way street lower for energy commodities, and thus for oil-related stocks. The downtrend has been firmly in place since the summer of 2014, and after some stabilization/consolidation last autumn, the selling pressure once again increased in December and January.
While the recent malaise in stocks and other risk assets has been the result of a host of factors — most of which scream “deflation” — for active investing and trading purposes, as long as oil prices don’t find better footing, this risk-off environment likely won’t end.
I have been on the record about this for months, and indeed the price of oil as of this writing has bounced well more than 10% since Wednesday’s multiyear lows.
From a risk management perspective, I would be remiss not to share that in bear markets or otherwise higher-volatility environments, the correlation among stocks and risk assets in general tends to rise. This plays in well with what I just discussed in the previous paragraph (i.e., that a near- to medium-term low in the price of oil would bring about an equally nice rally in stocks).
Furthermore, for stock traders and investors, this means picking away at single-name stocks is somewhat riskier than playing the indices or ETFs. You don’t want the unfortunate luck of picking the one stock that for some idiosyncratic news headline ends up not rallying along with 90% of the broader market.
OIH Charts
As such, in the current environment, I like the OIH ETF, which holds names like Schlumberger Limited (NYSE:SLB), Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI).
On the multiyear weekly chart, we see that the December/January selloff has now brought the OIH back down to its 2008-09 financial crisis lows. The slope of this latest selling spree is steep, yet the Relative Strength Index at the bottom of the chart is still marginally making higher lows. At the very least, a dead-cat or oversold bounce from these levels makes sense.
On the daily chart, note that the MACD oscillator on Wednesday pushed below the August 2015 readings as the OIH ETF further disconnects from its medium-term moving averages.
Speaking of moving averages, the OIH has been trading below its blue 8-day moving average for 12 consecutive days and below its yellow 21-day moving aveage since early December 2015.
These are historic readings, and after Wednesday’s bullish reversal, which was confirmed with Thursday’s bounce, all speak for a bounce back into the mid-$20s for now.
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