Like Rocky Up From an 8 Count! Oil is Ready to Fight Back

• Posted by Greg Harmon
• on March 10th, 2011

Oil and Oil Services stock go up and down. The general public would think that they move in tandem. The trade recommendation here in January (link below) to go long the Servicer’s against short the Commodity however proved that not to be true. In fact it turned out to be a money trade for 5 weeks moving over 15%. Recently that relationship has reversed, like Rocky getting up of the mat, and has the potential for an even bigger trade in the other direction.

Ratio of $OIH to $USO Weekly Chart

The ratio chart above shows that with one day to go in the week, the ratio is breaking back into the channel. If the current candle holds tomorrow it will be a bearish engulfing candle, suggesting further downside. This will print as the Relative Strength Index (RSI) is breaking through the mid line and the Moving Average Convergence Divergence (MACD) indicator is bearishly crossing lower and turning negative.

Trade Idea: Long 3.7 USO and short 1 OIH (3700 USO vs 1000 OIH in round terms) at current ratio of 3.69 with a stop at the ratio above 3.85 and taking profits at the 50 day Simple Moving Average currently at 3.33 and a target of the bottom rail around 3.03. This is risking $57-61 per pair traded to make $155-172 for the first target and $280 -341 on the full move to the ratio of 3.03, putting up no money.

Oil Servicers Set to Outpace the Commodity

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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