Commodities Countdown

Reasons For Optimism In Oil Services

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I will be the first to admit that Energy has fallen like a rock in a truck dumping boulders. It has been widespread, unrefined "Sell, Sell, Sell". Perhaps being optimistic on the sector is way too bullish given the chart shape.  You can walk through a few things on the oil services chart below and form your own views. 

Unedited with just price data, the chart looks to be making lower highs over the long term. That's bearish.


However, with a few indicators and a closer examination of price, this could be a nice entry with a tight stop.

Price is the most important, so let's start there. The current price has just poked above a major support/resistance level at 141. The second thing on the chart I see that I like is the bounce off the 40 week moving average. The one long price bar below the 40 week MA bounced back immediately and price has started to climb again. This bounce held above the $125 level maintaining a series of up trend features since the August low. The features of an uptrend since August are the higher highs and higher lows. Lastly the price is back above the 40 WMA and historically that is a good place to look for breakouts from bases. The current push coincides with breaking above the major resistance level of 2017. 

Getting into the indicators on chart 2, the RSI is showing bull market characteristics by holding above 40 on the weekly chart. The full stochastic is reversing and starting to point up after reversing off a low level. When the full stochastic is not going into oversold territory on pullbacks, that can be a positive sign for bullish momentum. On the PPO, the histogram under construction is very small. An improving histogram after being so shallow below zero is also bullish. If the PPO can turn above its signal line here, this would be the first positive cross above zero since oil broke down in 2014. 

So the chart above is of an index and you can't trade that. However, the XES ETF is an Oil and Gas Services ETF that shows the same characteristics.

The nice part about looking at energy services here is the stop can be tight. 

I was bearish when the oil stocks were not following oil higher. Now that we have had a 25% flush in a few weeks, its time to look at this market again. 

What isn't going right?

The lower high on the PPO concerns me. However, at this point we can still enter near the lows and watch for this market to improve. If it can get turn higher here, it will be an excellent risk/reward entry if the PPO ends up pushing above the down sloping trend line. 

Secondly, the extreme selling volume in the past has not been a bullish sign to look for reversals soon after. 

The world of trading is never a green light. It's always cautionary and risk management is an important part of the trade. Keeping a tight stop and letting this run to the upside would be the plan. I typically like oil related trades into April. If we can see an explosive move higher, that can negate the bearish month we just had. 

I'll be talking more about oil stocks on the Canadian Technician video recording and the Commodities Countdown recording later this week. Here is a link to my Commodities Countdown article last week where Commodities stabilized but the direction was questionable

Good trading,
Greg Schnell, CMT, MFTA.

 

Greg Schnell
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com specializing in intermarket and commodities analysis. Based in Calgary, he is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is also the author of Stock Charts for Dummies (Wiley, 2018). Learn More
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