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TRADING ENVIRONMENT FOR ENERGY STOCKS LOOKS GOOD

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The current market environment is rather difficult to be sure; but the moving of the chess pieces underneath the market surface is what interests us at present. We are focused upon the Energy Sector (XLE) in general, and the Oil Services Group (OSX) in particular. To this end, we find OSX moving higher in absolute terms, but also poised to move higher in relative terms versus Crude Oil ($WTIC) and the S&P 500 ($SPX). Thus, we want to be overweight either the stocks that make up the OSX (SLB, BHI, NBR and others) or the Oil Services ETF (OIH).

Looking at the technicals in the Oil Services/Crude Oil Ratio (OSX:$WTIC), prices stand at 2.36, which is very close to the low range of 1.9-to-2.20 that prices have bottomed in over the past 15-years. This simply means the risk-reward is skewed towards higher prices; and indeed we find a massive "head & shoulders" bottom forming, which will be confirmed on a breakout above neckline resistance at 3.0 as well as the 600-week moving average at 2.92. This shouldn't be too difficult given the highs of the past 4-years are in the mid 3.0 range. Moreover, the 40-week stochastic reached to oversold levels, and is now rising.

Lastly, we should note that upon viewing the weekly charts of the individual stocks making up the OSX, our models are at levels back to the 2009 bottom - and they are turning higher. So, regardless of your market outlook - the trading environment for energy stocks looks to be very good indeed.

Osx-wtic 7-20-12

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