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Oil Is Coiled

12/06/01 11:35:42 AM
by Austin Passamonte

The wedge formations that have developed on the charts for the oil indices are about ready to break.

Security:   OSX, XOI
Position:   N/A

The way oil prices have moved around recently one would think it was pork bellies of days gone by! Or more recently the NDX, but 1998 - early 2000 is gone forever we're sad to say.

Back to the point, fundamental market uncertainty in the patch has driven oil prices all over the map. A recent drop to prices below $20 barrel for crude have seen gasoline and heating oil follow suit. Is it game over for "black gold" in the foreseeable future?

Figure 1: Weekly/Daily Charts - OSX Oil Services Index
Graphic provided by:
Graphic provided by: QCharts.
From this summer until now, Oil Services Index prices have been coiling themselves into a wedge. Which way it breaks remains anyone's guess, but a consolidation near recent lows can indeed be expected to continue the downtrend from here. Stochastic values are stuck right between oversold/overbought extremes and offer little guidance right now.

Daily chart stochastic values are within overbought extreme and look rather weak at that. With price action two-thirds within the total wedge pattern formed, a break either way is imminent. We could consider going long or short underlying options (Jan 85 calls: OSX-AQ & Jan 75 puts: OSX-MO) on a break of the wedge either way.

Schlumberger is also a main component of this index and would be an excellent proxy to game with shares or underlying options as well.

Figure 2: Weekly/Daily Charts - XOI CBOE Oil Index
Graphics courtesy of Qcharts

We see a similar, unclear pattern in oil stocks index as well. Wedges here are getting close to breaking and stochastic values remain bullish for now but incongruous across both time frames. A mutual alignment in one extreme or the other as price action nears one side of these wedges gives us a better than average guess on which direction lies next. That's the watch we're currently on.

Make no mistake: oil prices will soon flow strongly one way or the other. Opportunity to profit in stocks, equity or index options and/or futures contracts is setting up and the spigot will open when chart patterns break!

Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Address: PO Box 633
Naples, NY 14512
E-mail address:

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