Has the AMEX Oil Index Put in a Significant Bottom

05/13/03 03:24:18 PM

by Kevin Hopson

The AMEX Oil Index (XOI) has been in a two-year downtrend but is now showing signs of reversing course.

Security: XOI
Position: Accumulate

The last time I touched on the AMEX Oil Index (XOI), a price-weighted index of large-cap integrated oil companies, I mentioned how the group appeared to be putting in the fifth and final wave of its long-term downtrend. Additionally, the large falling wedge formation (which is usually resolved by a break to the upside) supported my theory that the index was close to a significant bottom reversal. Though the XOI looks to have broken out of this formation, it may be too early to determine whether or not the two-year downtrend has reversed.

However, there are some positive indicators that help support the case for the bulls. For example, notice on the three-year chart how the relative strength index (RSI) and the moving average convergence/divergence (MACD) were putting in higher lows while the index was putting in lower lows. These were bullish divergences and indicated a forthcoming bottom reversal in the index. Also, notice how the XOI recently moved above its 200-day moving average (444.45). The last time the index traded above this moving average was last summer. As a result, the bulls could definitely make a case for higher prices right now.

Three-Year Chart for the XOI

Graphic provided by: StockCharts.com.

If you look at the six-month chart though, you will see that the index is coming up on a confluence of trendline resistance. More specifically, the black median line and top blue parallel line are both converging in the 454 to 456 range, which should act as near-term resistance for the XOI. However, because I believe a significant bottom has already been put in, I would look to accumulate these stocks on future weakness. If the index pulls back below its 200-day moving average in the near-term, I would consider the 428 to 433 range a good buying area. The reason being that the blue median line (on the six-month chart) and the top line of the falling wedge formation (on the three-year chart) are both converging around the 430 level. Additionally, the 50-day moving average (433) also resides at these levels.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.