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by David Penn
Oil prices are rocketing to new highs nearly every day. So why aren't the oil stocks going along for the ride?
Position: N/A
David Penn
Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.
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GAPS
Lonesome Oil
08/13/04 01:46:06 PMby David Penn
Oil prices are rocketing to new highs nearly every day. So why aren't the oil stocks going along for the ride?
Position: N/A
| I'm hardly the first technical analyst to ask the question. But the question itself seems so important that it is worth asking again: if oil prices are headed for the stratosphere, then why are the oil stocks sinking to the pavement? |
| I probably don't even need to post a chart of crude oil. Any trader -- stocks or futures -- who hasn't had the relentless rally in crude oil futures imprinted into his or her brain by now, well, is probably a lot better of than the rest of us. Take a look at December crude. |
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| Figure 1: After a brief correction in June, December crude was back to its old bull market tricks. |
| Graphic provided by: Prophet Financial Systems, Inc. |
| |
| Not much you can fade in this rally -- at least not without getting your head handed to you. But consider this chart of the oil service HOLDRs. |
 Figure 2: Oil service stocks topped out in July, even as the price of crude oil set new highs in August. What gives? Who is telling the truth on the prognosis for oil: the stocks, which represent bets on the earnings of companies in the oil business; or the crude itself? Similar stock/commodity discrepancies have occurred with gold and gold stocks in the past, and traders and analysts have lined up on both sides of the debate over which is the "leading" indicator: the stocks or the commodity itself. One technical analyst who has done more in this realm of intermarket technical analysis than most is John Murphy, who suggests in his 1991 book, Intermarket Technical Analysis: During 1987 gold rose only 40 percent while gold shares gained 200 percent. From the fall of 1989 to January 1990, gold shares rose 50 percent while gold gained only about 16 percent. The explanation lies in the fact that gold shares offer leverage arising from the fact that mining profits rise more sharply than the price of the gold itself. |
Is a similar dynamic at work between oil and oil stocks? Murphy observes later that "the basic premise is the same; Namely, that there is a strong relationship between the price of oil and oil shares." This underscores a relationship, a connection. But if either is playing the role of the "lead," Murphy seems to suggest that it is the crude. Again:Although oil shares have outperformed the price of oil [from 1985 into early 1990], turning points in oil futures have had a strong influence over similar turning points in oil shares. So if the crude oil chart looked like the oil stocks chart, then we'd have reason, per Murphy, to be bearish on both crude oil and oil stocks. We would take a turning down of crude oil in July as a sign that, perhaps, oil stocks would be correcting shortly afterward. But the case as presented reflects the exact opposite; crude has given no such "signal." The most interesting development on the chart of the oil service HOLDRS (and in the like chart of the Philadelphia Oil Services Index or $OSX) is the gap up in mid-June (June 16th to be specific). Since that time, oil service stocks have both zoomed higher and corrected just as sharply. Presently, OIH is resting right on top of that gap area, roughly between 68.5 and 69.5. This gap area, it appears, could serve as a support level, from which prices will move higher -- perhaps testing the August highs. A variation on this is the fill-n-go, in which a stock closes a gap in order to resume its previous trend. In the oil stocks scenario, that would mean a bit more downside to close the gap between 69.5 and 68.5, and then, gap filled, a strong move back upward. |
Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.
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