Based on the Oil
Investment Update posted on Mar 5, 2015 4:25 PM
Looking at the chart of crude oil from today’s point of view, we can say
that the first week of a new month was quite good for oil bulls. Although we
saw a drop below the level of $49, the buyers didn’t give up and pushed the
commodity to a weekly high of $52.40. And what did happen with the oil stocks
at the same time? They dropped below the lower border of the rising trend
channel and closed the supportive gap between the Feb 2 high and the Feb 3
low. Does it mean that they become weaker in relation to crude oil? How low
could the XOI go? Before we try to answer these questions, let’s take a look
at the NYSE Arca Oil Index (XOI) charts to find out what the current
situation in the oil stock market is. Let’s start with a look at the monthly
chart of the XOI (charts courtesy by http://stockcharts.com).
From the long-term perspective, we see that although the XOI invalidated
the breakout above the 38.2% Fibonacci retracement (based on the entire
2008-2014 rally) and the 50-month moving average (which is a bearish signal),
the index still remains above the previously-broken long-term
support/resistance line (based on the Mar 2009 and Oct 2011 lows), which
serves as the key support at the moment.
Will we see a test of the strength of this important support in the coming
month? Let’s examine the weekly chart and find out.
On the above chart, we see that although the XOI climbed above the barrier
of 1,400, the index reversed and came back to the previously-broken 50%
Fibonacci retracement level (based on the 2011-2014 increase) and the
200-week moving average. Yesterday, this support area was broken, which
suggests that we’ll see further deterioration and the initial downside target
for oil bears would be around 1,320, where the 50% Fibonacci retracement
(based on the entire Jan-Feb rally) is. Nevertheless, if oil bulls fail there,
the next support would be at 1,300, where the next psychologically important
level is. Please note that the current position of the CCI and Stochastic
Oscillator supports the above-mentioned scenario at the moment.
However, to have a more complete picture of the current situation in the
XOI, let’s zoom in our picture and look for more clues about future moves on
the daily chart.
Looking at the above chart, we see that although the XOI moved higher in
the previous month, the strong resistance zone created by the combination of
the 38.2% Fibonacci retracement (based on the Jun-Oct decline), the 61.8%
Fibonacci retracement (based on the Nov-Dec decline), and the Dec 3 high
stopped further improvement once again. As a result oil stocks reversed and
broke below the lower border of the rising trend channel, which is a negative
signal that suggests further deterioration. Nevertheless, when we take a
closer look at the above chart, we see that the recent decline took the XOI
to the green support zone created by the gap (between Feb 2 high and Feb 3
low), the 38.2% Fibonacci retracement (based on the Jan-Feb rally) and the
50-day moving average.
Yesterday, oil stocks closed the day under these levels, which is a strong
negative signal, which suggests further deterioration and a drop to the 50%
(around 1,320) or even 61.8% Fibonacci retracement (around 1,295). At this
point, it is worth noting that in this area the size of the downswing will
correspond to the height of the rising trend channel, which could reduce the
selling pressure. Taking into account the current position of the daily
indicators (sell signals remain in place), it seems that this scenario will
be n play in the coming days.
Summing up, oil stocks broke below the support zone
created by the gap (between Feb 2 high and Feb 3 low), the 38.2% Fibonacci
retracement (based on the Jan-Feb rally) and the 50-day moving average, which
suggests further deterioration. Additionally, the current position of the
daily and weekly indicators suggests that oil bears will show their claws
once again and push the index to the initial downside target around 1,320,
where the 50% Fibonacci retracement based on the Jan-Feb rally (and located
slightly lower the previously-broken long-term support/resistance line based
on the Mar 2009 and Oct 2011 lows) is.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Oil
Investment Updates
Oil
Trading Alerts
