The price of oil and thus oil-related stocks have once again been in a sea of hurt year-to-date. While the multi-year trend for these assets remains lousy if not downright ugly, fewer and fewer traders seem to be willing to step in and buy this space, which is exactly what may bode well for a better bounce and bottom building process.
The VanEck Vectors Oil Services ETF (NYSEARCA:OIH) represents oil services stocks and its movement is often times closely correlated to the price of oil. It’s performance YTD is a loss of -17.5%, despite the bounce thus far this week.
While my primary objective in most trade ideas discussed in this column five days per week revolves around near- to intermediate-term ‘trading’ opportunities, I always make it clear that understanding the asset in question starts by gaining perspective in multiple time frames.
Furthermore, not infrequently near- to intermediate-term trading opportunities may provide themselves in stocks or exchange-traded funds that through a longer-term lens may remain in a malaise.
To wit, both the charts of oil and of the OIH from a multi-year look continue making a series of lower highs as indicated by the red down arrows. Commodity analysts will point to an oil supply glut possibly due to a combination of better technology and marginally less demand, while bearish economists will blame this on a lack of global growth. Either way, there is little to like just yet from a more structural and multi-year perspective on this chart.
From a price action perspective, however, there is one little nugget worth pointing to; while the price of the OIH continued to drop into early 2016, momentum as represented by the MACD oscillator at the bottom of the chart had bottomed out in early 2015 and continues to print higher lows ever since. We call this ‘positive divergence’ and it often times can be an early sign of a bigger picture bottom building process.
Moving over to the daily chart we see that as a result the renewed weakness in the OIH since the recent top in December 2016, its intermediate-term moving averages (50, 100 and 200 day) are all either pointing lower or in the case of the 200-day, flat-lining. As a general rule I prefer to buy stocks or etfs where the 50 and 100 day moving averages are pointing higher and the stock is trading above the 200 day moving average.
At present the OIH is trading about 8% below the red 200-day moving average and thus, according to this set of rules, it would not be something for me to buy.
However, note that on May 4 the OIH bounced off an area of confluence support in the $26 to $27 range (blue horizontal). This zone is made up of previous horizontal support from last year as well as an exact 61.80% Fibonacci retracement of the entire rally from the January 2016 lows up into the December 2016 highs.
So, what’s the trade? The bulls have very well defined risk at this juncture, namely the May 4 lows near $26.40 as a stop loss. A trade higher from here toward the $30-level through a multi-week lens in my eyes has respectable reward to risk despite the still lousy looking longer-term picture.
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