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Today's Market WrapUp 12.23.2008 Mon Tue Wed Thu Fri Barbera Archive Oil Services in the Trash Bin? Life and its perverse twists, you just never know what you will run into, and perhaps nowhere is that more accurate than in the markets. Take the thriving sector for Oil Services, which over the last few days has checked in at the bottom of the Investors Business Daily Group rankings. That’s right, scanning the bottom few entries on the table from IBD, we see “Oil & Gas Machinery Equipment” at #195, “Oil and Gas Drilling” at #193, and “Oil & Gas Exploration” at #190. Now, keep in mind there are only 197 groups in the table! Thus, at #195, #193, and #190, the energy “finding” business would appear to be rock bottom. Of course, this implies that we have enough energy to meet future needs as a global economy, when nothing in fact could be further from the truth. How the mighty have fallen, as names like TransOcean-Offshore
(-73.30%), Schlumberger
Source: RigLogix
Source: RigLogix Thus, it seems the market is over-reacting, tangled up in a huge bout of panic emotional selling akin to psychology of ‘the sky is falling’ where oil exploration is concerned. How ironic in that there is virtually no disagreement among leading experts as to the need for aggressively stepping up the level of Oil exploration in the years ahead. While ‘peak oil’ may be delayed, or may in fact have already been reached, there is a certain inexorability to the exhaustion of fossil fuels, and as aggregate supplies decline in the years ahead, the need for more Oil and alternative energy will soar. When viewed on a three to five year basis, it is hard to imagine a sector more important to the global economy than Energy and within Energy, Energy Exploration. As a result, I decided to do a little historical homework on the Oil Service group using some of my long term index data. My goal was to characterize the recent decline in light of the groups past high levels of volatility. In my work, I was able to go back to 1968 as a start, for a total span of 40 years. The charts that follow show graphically some of the nastiest, most concentrated declines in the history of this group.
In the table below, I summarize the historical track record showing the most severe, uninterrupted declines going back the last 40 years. In every case, there was no rally greater than 20% within the context of the tabulated decline. On the column to the far right, I show the total percentage decline as a function of the total number of trading days involved to create the decline, what could be called the ‘concentrated selling factor.” At present, the current decline, which is within whispering distance of the December 5th lows would rank second on the all time list of most concentrated declines; in my view, pretty remarkable stuff I see in the markets these days…
Above: Oil service stocks relative to Large Cap Oils (top clip) and lower clip, long term RSI on the R/S Ratio. Oil Service stocks have been hit hard, really hard over the last few months, in what has been one of the worst episodes of concentrated selling ever... I also see evidence of major extremes in comparing the downside behavior of Oil Service stocks to their large cap brethren. Again, this has been one of the most extreme one directional moves ever seen. Finally, I end this update with a pair of interesting snap shots, the first with Crude Oil and the second showing Oil and the price action of leading issues over the last few days. On the Crude Oil chart, the Elliott wave structure now looks fully played out to the downside, with an extended third wave, and most recently, a fifth wave lounging down toward the lower trading band. This smacks of an oversold extreme. Next, I point out that so far, despite a relentless string of new lower lows in the price of Oil (as measured roughly by USO), any number of leading issues thus far have NOT moved to lower lows. In my review of past historical precedent, this kind of subtle increase in relative strength is often a gauge of a building low, in this case, a low that could be quite the longer-range bottom.
Above: Oil Wave Count shows a full five waves down, with positive divergence on RSI.
Above: TransOcean (RIG) creating a double bottom? Possibly, as prices are refusing to follow Oil to new lows.
Above: Oil Services as depicted by the OIH ETF, NOT confirming new lower lows in Oil, potentially very powerful bullish divergence. Wishing Everyone a very Happy Holiday, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
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