The Dow Report: A Brief Look at Oil and Oil Stocks
By Tim W Wood CPA, February 4, 2005
Today I would like to look at a couple of oil indexes as well as crude itself. In doing so, I would like to simply apply my Trend Indicator. This indictor is designed to help identify the intermediate term trend. In using this indicator there are simply two things we look for. That being, the direction of the indicator and divergences.
The first chart below is a weekly chart of the AMEX Oil Index. If we begin at the 2003 low you will see that there was a small divergence that formed, indicating a possible trend change. The fact that this divergence occurred in conjunction with longer term cycle lows, served as added technical evidence that a significant low was forming. Notice how the Trend Indicator turned up at this low and trended steadily higher into May 2004. There were then some minor price corrections that were also accompanied by down turns in the Trend Indicator. But, also notice that after each of these price corrections the Trend Indicator also turned back up and confirmed the higher price high. This was indeed very bullish action.
The most recent advance in price has carried the AMEX Oil Index to a new high. Furthermore, the Trend Indicator has turned up and crossed over its trigger line confirming this latest price advance. This is again bullish action. The only cautionary issue that I want to point out here is that the Trend Indicator has not had time to move back up above its recent highs. We do want to see this happen in order to serve as another layer of bullish confirmation for this sector. Otherwise, we will be at risk of seeing divergences develop that could in turn become an issue for this sector.
The next chart below is of the Oil Service Index. This index formed a major cycle low in late 2001. This index has not been as strong as the AMEX Oil Index above, but has been in an up trend since the cycle low in 2001. Also, the Trend Indicator has not been as strong on this index but it has nevertheless confirmed each successively higher price high since 2001. It's hard to see on this chart but the Trend Indicator is currently positive with no divergences.
The chart below is a weekly chart of crude oil. Beginning at the 2001 low the Trend Indicator also confirmed the successively high price highs in crude. Even the recent $55 price peak was confirmed by the Trend Indicator. However, this indicator does not have to diverge at tops and bottoms to produce a signal. The actual signal comes when the Trend Indicator, the green one, crosses over its trigger line. You can see that the Trend Indicator has crossed over and turned down confirming the price break down from the $55 high. From that high oil moved down into the intermediate term cycle low, which occurred on December 10, 2004 at $40.25. From that low oil rallied into what now appears to be an intermediate term cycle top. Notice that the Trend Indicator was not able to crossover and confirm this intermediate term rally. This is not a very positive sign for oil prices. The current price/oscillator picture is telling us that lower oil prices lie ahead.
The bottom line here is that the technical pictures for oil and the oil stocks currently are not in sync. The oil stocks look positive with recent advances taking them to new high ground for the current moves. But, oil itself is not performing well here. The price/oscillator picture for oil is indeed bearish and will remain so unless the Trend Indicator can turn up.
Over the last couple of weeks I have mentioned that I have greatly expanded my newsletter service to include not only the monthly newsletter, but also web based comments during the week. I also provide charts on the stock market, the dollar, bonds, gold, silver, oil, the HUI and others that include my proprietary Cycle Turn Indicator and Trend Indicators. If you are interested in a service that is a detailed technical based newsletter with a focus on the Dow theory, cycles analysis and the works of master technician George Lindsay, along with web based comments and these indicators, please visit www.cyclesman.com for details and Contact Information.
Tim W. Wood
© 2005 Tim Wood