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Larry’s note: Welcome to Trading with Larry Benedict, the brand new 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’ve been 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… |
With key inflation numbers due Friday, policy makers will be preparing to burn the midnight oil…
And since the last Federal Open Market Committee (FOMC) meeting of the year kicks off next Tuesday, they’ll only have a few days to get through all the latest inflation data.
After inflation jumped to 6.2% last month – a 30-year high – the upcoming report will go a long way in guiding the Fed’s monetary policy (asset purchase taper and interest rates) as we head into 2022.
But while the Fed concerns itself with the broader economic picture, consumers will be more worried about things like food and gas. With food costs continuing to increase, the fall in the oil price over the past month has at least provided some relief.
As the oil price fell from its recent highs, however, so did another sector that often tracks it closely… the oil services sector. It’s a sector we’ve been following closely over the past couple of months.
When we last checked out VanEck Oil Services ETF (OIH) three weeks ago (red arrow below), we saw that OIH’s fall was gaining momentum…
VanEck Oil Services ETF (OIH)
Source: eSignal
The Relative Strength Index (RSI) had broken below its 50% support level, and the 10-day moving average (MA – red line) was just in the process of crossing down over the long-term 50-day MA (blue line).
From there, the next test for OIH was the price level represented by the lower green horizontal line in the chart (D). As you can see, OIH hit this level in the past week.
This level is important because it represents the completion of a head and shoulders pattern, which is often an indication of a major reversal.
This pattern began all the way back in March (A) when the first shoulder was formed. (Note: ‘B’ is the head, and ‘C’ is the other shoulder). This price level at ‘D’ (also known as the neckline) now becomes critical as to what plays out from here.
As you can see, OIH traded down to and bounced off this level. This bounce coincided with the RSI going into oversold territory.
In fact, the RSI began flattening out just prior to this, hinting at declining selling momentum… and a potential change in direction.
Right now, though, the bounce in OIH is still in its early days. OIH is still very close to the lower green line…
VanEck Oil Services ETF (OIH)
Source: eSignal
For OIH to keep rallying from here, we’ll need to see the RSI head back up towards the 50% support/resistance (green) line. If the RSI breaks above resistance, then OIH could head back up towards the middle of the two green lines.
However, if the RSI fails to break through that resistance and instead heads lower, then all eyes will be on the lower green line.
Remember that with the head and shoulders pattern complete, what sets the reversal trade into motion is a break below that green line.
If OIH breaks strongly below that line (and that green line changes to resistance), then that has the potential to set up a big move down. We’d aim to capture that move by entering a short trade.
However, if OIH fails to break below that green line – meaning that it remains as a support level – then that means the head and shoulders pattern is morphing into a sideways pattern.
While that might not offer the same profit potential as a big move down, it could still provide the opportunity to generate mean reversion trades.
Either way, the price action around that green line will become crucial as we head into the end of the year… It could also throw up plenty of trading opportunities.
I’ll continue to watch it closely as I scope out future trades.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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