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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
One of the most important stories this year has been the dramatic rise in oil.
Just last month, crude oil traded at almost $125 a barrel – its highest level in more than 10 years. That high represented an 85% gain on oil’s trading price from December 2021.
This price rise has been a boon to oil producers and a nightmare to motorists. But oil production isn’t the only sector that’s benefitting.
On the chart below, the VanEck Oil Services ETF (OIH) rallied strongly off the oil boom by an impressive 83%.
Today, I’m going to discuss what’s next for this vital sector. Because just like the oil price, OIH has sold off sharply over this past week.
Widespread surges in COVID cases across China – the world’s largest importer of oil – are causing its economy to slow down. This has major ramifications for both the oil price and OIH.
On the OIH chart below, you can see how it’s almost in freefall…
VanEck Oil Services ETF (OIH)
Source: eSignal
When we last checked OIH in January (red arrow on the chart), the 10-day moving average (MA – red line) had recently broken above the 50-day moving average (MA – blue line).
Plus, there was another bullish signal…
The Relative Strength Index (RSI – lower portion of the chart) had recently broken through resistance (green line) and into the upper half of its band.
After briefly going into overbought territory above the upper grey line, the RSI rolled over causing OIH to pull back.
But with the RSI remaining above the green line, buying momentum continued to push OIH higher. The angle of the 50-day MA’s upturn in late January shows the strength of OIH’s rally.
Divergence between the RSI and OIH share price (orange lines) indicated a potential change of direction. While OIH rallied to its recent high, the RSI made a lower high.
Take another look…
VanEck Oil Services ETF (OIH)
Source: eSignal
After OIH’s near 20% fall this week, the RSI is once again in the lower half of its band.
So, what can we expect from here?
Well, after such a sharp fall, we can expect this volatility to continue. Meaning, there could be plenty of trading opportunities with OIH in both directions ahead.
I’ll also closely follow the RSI…
If the RSI remains in the lower half of this band, we can expect this downtrend to continue. The next test would be for OIH to hold support at around $235.
But if the RSI goes into oversold territory (below the lower grey line), that could provide the opportunity for a long counter trade.
The two red circles on the chart, show the last time the RSI gave an oversold signal. As you can see, the RSI rallied again and soon tested resistance after forming a ‘V.’
Then, when the RSI broke through resistance and into the top half of its range, OIH also went on to rally strongly.
We’ll see if this pattern repeats with OIH over the coming weeks.
When you see a big drop like this in OIH, it’s tempting to jump in and try to pick a bottom. But doing so is a sure-fire way to tear up your money.
Instead, we need to sit tight and watch the chart closely. We’ll enter a trade only if our indicators show a strong setup.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
I always appreciate the kind words from my readers…
Another great insight to the market. The great P/E reset is in full swing. If AAPL disappoints next week, it’s beans and rice time!
– Darren H.
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