WHAT TO DO WITH ENERGY NOW -- THE NEED FOR SOME TECHNICAL READING
LONG-TERM CHART OF OIH ... Once again, I need to clarify the difference between short and long-term market action. A reader recently asked where the next upside target for the OIH was. I showed the following chart with an upside target near 98. That was a long-term projection. Obviously, this week's downside correction has weakened the short-term trend. But so far at least, it hasn't changed the long-term trend. For that to happen, the OIH would have to break decisively below its early 2002 peak near 75 (see flat line). One of our readers complained that he'd lost money since that chart was posted on November 24. I'm not surprised. A glance at the daily chart shows that wasn't a good day to buy. I never said that it was. Back in October, I suggested holding onto a core energy position no matter what. I had suggested profit-taking for shorter term traders as the energy sector declined during that month, and recommended reinstatement of those short-term positions in mid-November when the energy group started its move to new highs. After this week's downside action, it's clear that any recent new longs should probably be liquidated. I'd still stay with a core energy position. My long range outlook for energy is positive and I expect $40 to act as a floor under the oil market.
Chart 1
Chart 2
Chart 3
WHERE ENERGY WAS A YEAR AGO ... I started recommending buying into the energy market a year ago December 04, 2003. That early December update from a year ago (along with several others that month) showed the upside breakout in oil and talked about how to use the Energy Select Sector SPDR (XLE) to take advantage of the energy upturn. The arrow in Chart 2 shows where the XLE was at the time of that recommendation. Chart 3 shows where the Oil Service Holders (OIH) where at the time also. On November 10 of this year, I wrote that it "May Be Time to Reenter Energy Sector" (November 10, 2004). The first arrow in the following chart shows where the OIH was on that day. If someone decided to take a new position on November 24 after the OIH had hit a new high (second arrow), that decision didn't come from me.
Chart 4
DO SOME READING ON THE SUBJECT... This site is technical in nature. Although I try hard to explain the reasons behind my market analysis, it isn't possible to explain everything in a daily update. The question of taking short-term trading positions versus long-term investing decisions is also confusing to some. The feedback I get on my updates also shows that many readers still confuse short-term observations with longer-term views. Of the two, the longer-term views are the more important. Shorter-term updates are just an attempt to fine-tune the relatively minor swings. For those readers who are relatively new to technical analysis, I strongly recommend doing some reading on the subject. The more you understand about the subject, the more value you'll get from my daily updates. That doesn't mean that I'm always right. But at least you'll have a better understanding of what I'm writing. The Stockcharts.com bookstore offers a lot of educational reading material. For those just starting out, I'd recommend my book The Visual Investor. More experienced readers might want to try Technical Analysis of the Financial Markets which is a more thorough treatment of the subject. Virtually everything technical that I write about on this site can be found in that book. Intermarket Analysis provides an up-to-date interpretion of market linkages. Most of the recent intermarket relationships that I've written about this year -- the falling dollar, rising gold, the role of oil, interest rates, sector rotations, global trends, etc. are all explained in that book. There are many other excellent books in addition to those. Give yourself a gift of a good technical book for the holidays. And then make a New Year's resolution to read it.
