OIL SERVICE STOCKS ARE UP AGAINST RESISTANCE AND VULNERABLE TO PROFIT-TAKING -- SEMIS ARE TESTING DECEMBER HIGHS -- THAT'S A GOOD COMBINATION FOR THE MARKET
OIL SERVICE STOCKS STARTING TO CORRECT... Earlier today I wrote about an overbought energy sector that was starting to experience some profit-taking. Oil service stocks were the day's weakest group. Although that group is also overbought, there's another longer-range technical reason why oil service stocks are running into some trouble here. But first the short-term picture. The daily bars in Chart 1 show the Oil Service Holders falling for the second day in a row on heavy volume. That in itself is a warning. The 9-day RSI line, which has been trading at or near overbought territory over 70, has fallen to the lowest level in nearly two months. That also suggests loss of upside momentum. As to how far down a correction could go, keep an eye on the two moving average lines. The red line is the 20-day average. That's usually the first line of defense. If it doesn't hold, the OIH could drop all the way to its (blue) 50-day average. The black lines show that the 50-day line sits right between the 50% and 62% retracement levels of the last upleg that started in early January. The latter level also coincides with chart support along the November/ December highs. I can't say the OIH will drop that far; but if it does, that would probably represent a good buying area. Now for the long-term look.
Chart 1
OIL SERVICE INDEX REACHES MAJOR RESISTANCE ... I've written several bullish pieces on the energy sector over the last year. Last October, I recommended short-term profit-taking as oil started a correction from $55 to $40. During January, I recommended reentry into the sector as the last upleg was starting. On January 27 I wrote a piece on why I thought oil service stocks were the best value in the energy sector January 27, 2005. I still happen to think that's true. Over the short-run, however, I think oil service stocks are vulnerable to some profit-taking from current levels. Chart 2 shows why. The monthly bars shows that the Oil Service Index (OSX) has reached major resistance levels formed by the highs reached during 2000 and 1997 (see circles). At the same time, the monthly RSI line has reached overbought territory over 70 which marked the last two tops (see arrows). I happen to think that those highs will eventually be exceeded. Before that happens, however, the OSX looks vulnerable to some short-term selling. At the very least, that suggests to me that this isn't a good spot to be buying. Although other energy indexes have reached new high ground, they also look dangerously over-extended. For those looking to buy into this hot sector, I'd suggest waiting until the selling has run its course or until prices have moved closer to chart support and/or moving average lines like those shown in Chart 1.
Chart 2
SOX INDEX TESTING DECEMBER HIGH. ... Earlier today I wrote that energy weakness, combined with upside leadership by semiconductors, could give a boost to the rest of the market. Semiconductor stocks were the day's strongest group. The daily chart shows the Semiconductor (SOX) Index moving up to challenge its December high. Its relative strength line has been rising for over a month. If the SOX can exceed that important chart barrier, that would give a big boost to the technology sector, the Nasdaq, and the rest of the market. I've written many times that energy strength -- and SOX weakness -- was bad for the market. SOX strength, and energy weakness, would be a good thing. At the very least, it could enable the blue chip averages to extend their rallies into the spring. And it might even move the Nasdaq closer to its late 2004 highs.
Chart 3
