An Update On The Oil Services Index

10/26/04 10:40:26 AM

by Kevin Hopson

A test of this month's high will likely lead to an upside breakout for the Oil Services Index.

Security: OSX
Position: Hold

Though I recently wrote on the Oil Services Index (OSX), some interesting developments of late are worth mentioning. For example, if you look at the six-month chart, you will note that the index is currently bumping up against the black median line. Median lines tend to act as support when prices are trading above them and resistance when prices are trading below them. As a result, it is no surprise that the index is currently finding resistance along the median line after moving below it earlier this month. The index also faces resistance around the $125 level, which is the site of this month's high and the top blue parallel line.

However, note how the index failed to test support around the $112 level during the recent pullback. This is the site of the blue median line and the bottom black parallel line. This would have been the logical place for a bottom reversal to occur but the situation never materialized. As a result, if the index tests the top blue parallel line ($125 level) in the near future, the "price failure" rule will come into play. The price failure rule states that if the median line is not tested prior to a test of the top parallel line, an upside breakout is likely. In this instance, the price failure rule is a sign of strength, meaning that the top blue parallel line should be broken if it is tested. See Figure 1.

Figure 1: Six-month chart of the OSX

Graphic provided by: StockCharts.com.

If prices do move above the top blue parallel line, the next upside target could be the $136 level. More specifically, if you look at the long-term chart, note that the most significant area of resistance ($111-$112) has already been taken out. This was the site of the 61.8% retracement level from the autumn 2000 to autumn 2001 decline, as well as the autumn 2000 downtrend line (red line). As a result, if the index can break near-term resistance in the $123 to $125 range (which seems likely), the spring 2001 high -- which is the dotted blue line -- should act as the next upside target. In the meantime, I would continue to hold for higher prices. See Figure 2.

Figure 2: Oil Services Index

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.