WHY OIL SERVICE IS MY FAVORITE GROUP AND WHY IT REPRESENTS THE BEST ENERGY VALUE

OIL SERVICE STOCKS LOOK CHEAPER... I wrote yesterday that energy was my favorite market sector for the year and that oil service was my favorite group within that sector. Here's why. The three charts below show the three energy indexes that I track. The AMEX Oil Index (XOI) is an index of integrated oil companies. It broke out to a new record in the middle of last year and is still in a long-term uptrend. But it's not cheap. Chart 2 shows the Natural Gas Index (XNG) having broken through its early 2001 peak at the end of last year. That more recent breakout looks more appealing than the one shown in Chart 1. My favorite, however, is the Oil Service Index (OSX) shown in Chart 3. The monthly bars show that the OSX hit a three-year high in the second half of last year. It's moving up to test the highs formed in 1997 and 2000. Back in September (September 23, 2004) I did a similar comparison of the three energy groups (although at that time the Natural Gas Index hadn't yet broken out to a new record). The headline shown here on Chart 3 is the same one I wrote in September. I still believe that oil service is the best energy value.

Chart 1

Chart 2

Chart 3

BAKER HUGHES COMPLETES BULLISH TRIANGLE ... I showed this next chart on September 28 to help bolster my long-term bullish view on the oil service group. Baker Hughes is the biggest holding (10%) in the AMEX Oil Service Holders (OIH). That makes it worth paying attention to. I wrote last September that BHI was just completing a major "symmetrical triangle" extending back to 1997. The symmetrical triangle is defined by the two converging trendlines and covers nearly seven years. After breaking through the upper resistance line during September, the subsequent price dip found new support at the trendline. That's exactly what should happen. Previous resistance lines should become new support lines once they're exceeded (see arrows). The implications of the big triangle are very bullish. It calls for an eventual move above the 1997 peak. Another big OIH holding is Halliburton (9%). Its monthly bars show the stock on the verge of breaking through its seven year resistance line. Its relative strength line is just starting to climb. I recently listed Rowan as one of my favorite oil service chart patterns. Although it's one of the smaller holdings in the OIH (3%), its monthly chart shows it having just broken its long-term down trendline. RDC looks like a stock that's just starting a major uptrend. Charts like that make be very optimistic on the oil service group.

Chart 4

Chart 5

Chart 6