OIL SERVICE LEADS ENERGY REBOUND AS CRUDE OIL APPEARS TO HAVE BOTTOMED -- THAT MAY HELP YEAREND BOUNCE

OIL MAY HAVE BOTTOMED ... It looks like the fourth quarter correction in crude has probably ended. After dipping briefly below $60, crude oil jumped more than $2 yesterday and looks to have bottomed. The Commodity Channel (CCI) Index (on top of the chart) is turning up from oversold condition after showing a positive divergence. [A positive divergence exists when a market hits a new correction low while the CCI doesn't. See black arrow]. That usually signals that a correction has come too far. The proximity of crude to its 200-day average also shows that it's near long-term support. The MACD histogram bars have been improving over the last month and may be near a bullish crossing. On Tuesday, I showed the Energy SPDR (XLE) bouncing off its 200-day line which was another sign of new energy buying. Chart 2 shows the XLE moving up to test its 50-day line. Oil service stocks have already cleared that line.

Chart 1

Chart 2

OIL SERVICE HOLDERS CLEAR 50-DAY LINE ... Chart 3 shows the Oil Service Holders (OIH) moving above their 50-day moving average. They're the first energy group to do so and adds strength to the entire energy sector. This week's bounce in the OIH also helped to keep its long-term uptrend intact. I wrote an article a week ago (October 18, 2005) on the Oil Service Holders in which I argued that major support should materialize above the 100 level for two reasons Both are shown on the weekly bars in Chart 4. One was because of the proximity to the 40-week (200-day) moving average line. The other was the fact that the the previous peaks hit in 2000 and 2001 (see circle) should now act as major support levels. So far they have. I also wrote at the time that falling energy shares weren't necessarily a good thing for the market. I made the same point on Tuesday when I wrote that a bottom in energy shares could contribute to a fourth quarter market rally. As of today, energy shares are leading the market higher. New buying in energy shares carries both good and bad news for the market. It carries good news over the short-run because it adds new buying to the market. That may contribute to a yearend rally. Longer-term, however, renewed energy leadership is normally bad for the market. That fits in with my views which have turned more positive between now and yearend, but more bearish as we move into 2006. Natural gas prices have held up better than crude throughout the month, and led yesterday's energy climb. I expect that trend to continue.

Chart 3

Chart 4