OIL CLIMBS BACK OVER $51 -- OIL SERVICE LEADS ENERGY SECTOR HIGHER

CRUDE OIL BOUNCES OFF 200-DAY AVERAGE... Today's $1.58 gain in crude oil pushes it more than a dollar over the psychological $50 level and may represent a successful test of its 200-day moving average. That's giving a boost to energy stocks which have also been testing major support near their 200-day lines. To turn its trend back up again, however, crude needs to clear last week's high near $53 and/or its 50-day average. A lot of the recent market bounce has been predicated on a weaker energy sector. That's why today's energy bounce is causing some profit-taking.

Chart 1

OIL SERVICE HOLDERS LEAD ENERGY PATCH ... Earlier in the week I wrote about the Oil Service Index testing major chart support at its 200-day moving average and a major up trendline extending back to the end of 2003. In today's trading, the oil service group is leading the energy sector higher. Upside volume, however, has been on the light side. That needs to pick up if the energy rally is to continue. Chart 2 shows the Oil Service Holders (OIH) nearing a test of their 50-day average and initial resistance at 93.22. A close over that level could signal the end of the recent energy correction.

Chart 2

BAKER HUGHES IS BIGGEST OIH HOLDING... BHI is the biggest holding in the Oil Service Holders (10%). The stock has been a steady performer during the recent oil service correction. That's evident in its rising relative strength line (versus the OIH). That qualifies BHI as a potential leader in an energy upturn. Here again, upside volume has been light. But the stock is now trading over both moving average lines which is a positive sign. It still needs to clear its late April peak to confirm that its uptrend is resuming. The monthly bars in Chart 4 show that the oil service leader is challenging its all-time high formed in 1997. One of the reasons why I expect that old high to be exceeded is the presence of a huge "symmetrical triangle" on the monthly chart (see converging trendlines). That's usually a bullish pattern. That's one of the reasons that I'm still a long-term bull on the energy sector and why my longer-term view on stocks is still negative.

Chart 3

Chart 4