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Divergences Drive OIH Up

11/23/04 01:39:50 PM
by David Penn

A running positive divergence propels oil service HOLDRS to new highs.

Security:   OIH
Position:   N/A

If you've been reading Advantage in November, you've been treated to a number of insightful articles on the technical analysis of various oil industry stocks (see any number of articles by Kevin Hopson, most recently "Range Resources At Key Inflection Point," Advantage, November 18, 2004; RRC is enjoying a 9% breakout day as I write). Here I want to take a quick look at the current move up in oil service stocks in general, and an even closer look at the tools that traders could have used to anticipate it.

So often, traders see a perfect setup after the fact and fret that they will never see such an ideal situation again. I confess that's a bit how I felt in missing the Bush bounce in late October, one that was telegraphed by a double or running positive stochastic divergence, among other factors (see my "Divergences And The Bush Bounce," Advantage, November 9, 2004). But markets are made of people, and while people come in seemingly infinite varieties, there are types and patterns of behavior, and those types and patterns repeat themselves -- and no less infinitely so.

Figure 1: Oil Service HOLDRs. Two sets of positive divergences between the October and November lows in the intermediate term and between the early November and late November lows in the shorter-term anticipate a move higher in OIH. Note the support provided by the 50-day exponential moving average during the decline from the early October highs to the mid-November lows, as well as the potential for moving average support in the form of the 10-day exponential moving average during the breakout.
Graphic provided by: Prophet Financial, Inc.
What appears to have repeated itself is the same stochastic pattern that set up the Bush bounce in stocks in late October. Recall that the bounce consisted of a month-to-month positive stochastic divergence (September lows to October lows), which grew into an intramonth positive stochastic divergence (early October lows to late October lows). Here, we have the same sort of pattern in the OIH: a month-to-month positive stochastic divergence (October lows to November lows) and an intramonth positive stochastic divergence (early November lows to mid-November lows). So far, the results are the same: a sudden, powerful move higher.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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