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MARKETWATCH OIL - powerful new uptrend believed imminent...

by Clive Maund
www.clivemaund.com
November 25th, 2005

In recent weeks the spotlight has swung from the oil sector to the mining sector, as crude oil has drifted lower, which is precisely why we should keep a close eye on the oil sector, because a lot of people aren’t and many oil stocks are currently trading at good prices, given that the strong long-term uptrend in the oil sector has not broken down.

On the 6-month chart for West Texas Light Crude we can see the persistent downtrend of the past 2 months that has brought the price back to the vicinity of its rising 200-day moving average. At first sight this chart looks discouraging because of this persistent downtrend that followed completion of a small Head-and-Shoulders top. However, there is plenty of evidence that this downtrend has about exhausted itself; the measuring implications of the Head-and-Shoulders top have been fulfilled, and the downtrend has taken the form of a bullish falling wedge. Furthermore, the price is now in a zone of strong support, shown on the 3-year chart below, and in the vicinity of its still rising 200-day moving average, and is therefore at a classic “buy spot”, especially as its short-term oscillators are now turning up from oversold levels.

The 3-year chart for oil puts the recent retreat into perspective and reveals that the strong long-term uptrend has not been broken, and that therefore this decline should be regarded as nothing more than a normal reaction within a major uptrend. In other words it has thrown up a major buying opportunity.

The 6-month chart for the OIX oil index shows that oil stocks had already discounted the outstanding decline in oil by mid-October, after which they started to recoup lost ground. But with oil continuing to drift lower they didn’t “have permission” to stage a full blown rally. So instead the index has thrashed around marking out an intermediate base area above its 200-day moving average, and beneath resistance at about 540 that defines the top of this base area. Oil stocks are clearly setting themselves up for a major rally once the decline in crude ends and look set to take off once oil breaks out of its falling wedge pattern to the upside.

The 3-year chart for the OIX oil index reveals the powerful uptrend in oil stocks that shows no sign of ending, and indeed it would be odd if it did at this juncture, with the mining sector showing such strength, as gold and oil tend to advance in unison. On this chart we can see how the basing action of the past 6 weeks above the long-term trendline and 200-day moving average has set the market up for another intermediate uptrend that should take the index to a new high. On the downside, traders can protect themselves from runaway losses by the simple expedient of bailing on a 3% breach of the lower trendline.

The large oil stock that we are tracking, Conoco Phillips, pretty much conforms with the oil stock indices, which is what you would expect, the only notable differences being that it had a very strong rebound from its 200-day moving average, but has not done so well in recent days as oil stocks generally have advanced.

For added interest it is worth mentioning the Texas gas stock, Abraxas Petroleum, before ending, as this appears to be position for a powerful advance once the sector takes off again. This is a very strong stock which only corrected back to the vicinity of its 50-day moving average. On the 6-month chart we can see that, having formed an intermediate base over the past 5 weeks or so above a support level in the $6 area, it looks to be preparing to take out the resistance level at about $7.40 that defines the top of its intermediate base area. This can obviously be expected to happen around the time that the OIX index breaks out of its intermediate base area by breaking above its 540 resistance level. The huge volume that had developed in Abraxas by late September, early October, has died right back as this base area has formed, another bullish indication. Short-term oscillators, such as the MACD line shown at the bottom of the chart, are also turning up from depressed levels, another signal that an advance is in the offing.

We will look at another chart for Abraxas with the same timeframe of 6 months, but showing the Accumulation-Distribution and On-balance Volume lines. While On-balance Volume has been unimpressive as the price has reacted in recent weeks - in fact it has shown some relative weakness - it has started to turn up significantly over the past week or so, the Accumulation-Distribution line has continued to forge ahead to new highs, a strong indication that a new uptrend is to be expected soon.

Abraxas was first recommended on www.clivemaund.com back last March when it was trading at $2.75. Clive Maund

Clive.Maund@t-online.de

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany.

Visit his subscription website at clivemaund.com .[You can subscribe here].

No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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