When oil rallied strongly at the start of 2022, it brought several related sectors along for the ride.
One of those – the oil services sector – burst 70% higher from early January to April before rolling over and reversing.
When we looked at the VanEck Oil Services ETF (OIH) on April 27 (red arrow on the chart below), it was right in the middle of that reversal.
Then, OIH resumed its rally before peaking again in early June. From there, OIH fell 38% in just over a month.
However, since bottoming out in July, OIH has been showing promising signs of a new rally. And recently, it showed a new bullish signal.
So today, we’ll see how this move is playing out as we scope out potential trades…
Watching Momentum and Direction
On the chart below, the 50-day moving average (MA – blue line) shows OIH’s long-term trend…
VanEck Oil Services ETF (OIH)
Source: eSignal
It rose steadily from January through June before reversing and heading lower.
After OIH peaked at ‘A,’ two key technical signals warned of a downtrend…
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The Relative Strength Index (RSI) formed an inverse ‘V’ near overbought territory (upper grey dashed line). As the RSI retraced sharply and fell through support (green line), OIH’s stock price also fell.
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The 10-day MA (red line) bearishly crossed below the 50-day MA and began to accelerate lower.
After this steep fall, a common chart pattern warned of yet another potential change in direction.
As the RSI hinted downward, momentum had stalled (lower orange line) in oversold territory… OIH made lower lows (upper orange line).
Because momentum is a key driver of price, these two can’t head in different directions indefinitely. If they get too out of whack, they’ll eventually snap back the other way.
And that’s what happened here with OIH…
VanEck Oil Services ETF (OIH)
Source: eSignal
The RSI’s downward momentum dried up for over a month and selling pressure on OIH fizzled out. Then, when the RSI started to rally off that oversold level, OIH’s rally began.
I know I talk a lot about this divergence pattern between the RSI and stock price. But there’s a simple reason for that…
It helps spot an impending reversal. And this can really increase your odds of making a successful trade, while helping you avoid losing ones.
More recently, the 10-day MA has bullishly broken back above the 50-day MA.
So what can we expect from here?
Confirming the Trend
For this rally to take hold – and for us to consider entering a long position – the 10-day MA needs to accelerate further above the 50-day MA.
The stronger that pattern becomes, the bigger the chance of a prolonged rally. And confirmation of a longer-term trend would then depend on the 50-day MA tracking higher.
However, I’ll also keep an eye on the RSI. It’s been tracking on or just above support for most of this month.
For any longer-term rally to take hold, the RSI must continue tracking in the upper half of its range.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
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I read the Trading with Larry Benedict emails as soon as they hit my inbox. Although I don’t consider myself an inexperienced trader, I made the exact rookie mistake you warned about in your early August write-up on XLU. I bought a put because the RSI was in the oversold region.
The option price is down 41% but it’s a December put, so I’m going to hold on and hope it turns around. Thank you for your easy-to-understand analysis on stock charts and waiting for the right entry and exit points. Apparently, some of us just have to learn things the hard way. But… lesson learned!
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