Oil Service HOLDRS Enter Support Zone

05/18/05 01:58:32 PM

by Arthur Hill

After a high-volume decline, the oil service HOLDRS entered a support zone that could ultimately lead to a bullish reversal.

Security: OIH
Position: Hold

The 200-day moving average is an important indicator that can be used two ways. First, the indicator often acts as support in an uptrend and resistance in a downtrend. Second, a rising 200-day moving average reflects a long-term uptrend and a falling 200-day moving average reflects a long-term downtrend. Therefore, when a security reaches its "rising" 200-day moving average, traders should start looking for firming and a bullish reversal.

Figure 1: Oil service HOLDRS. With the decline over the last few months, the oil service HOLDRS traded into a large support zone, which is confirmed by the 200-day SMA near the top, the 50% retracement mark at the bottom, and the October-December consolidation.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

With the decline over the last few months, the oil service HOLDRS (OIH) traded into a large support zone (Figure 1). This zone is confirmed by the 200-day simple moving average (SMA) near the top, the 50% retracement mark at the bottom, and the October-December consolidation. It is a big support zone and the midpoint resides around 82.

While some support around the 200-day SMA can be expected, April's high-volume decline shows intense selling pressure that is unlikely to dissipate quickly. Downside volume has been extremely heavy since mid-March (blue box), and this was enough to carry the accumulation/distribution line to its November low. A correction should occur on lighter volume, and such high volume indicates that the decline may have further to go. As such, I would not start anticipating a bottom until downside volume dries up and upside volume starts to take the lead.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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