Trading the Ratio of Oil Servicers to Oil

• Posted by Greg Harmon
• on March 27th, 2015

Oil is down over 50% since its 2014 peak. There is a lot of debate about whether the current price action is a reversal or a consolidation before another drop. I am not sure which one it will be. The current range is a very important area of confluence of many events in the chart. Better to just let it confirm, one way or the other, where it wants to go.

But that does not mean there has not been a way to make money with Oil. The chart below shows one way that has been productive not matter which way oil is going. The ratio of the Oil Services Stocks ($OIH) to Oil ($USO) has been in a rising channel since late 2008. If you have been lucky enough to be involved with this since then congratulations. But I doubt many have been given, the tumultuous ride in Oil itself over this timeframe.

But now that you are aware of this relationship what can you do about it? The chart actually shows that the ratio is at the top of the channel. And in the short run it looks better to be short the ratio (long Oil and short the Servicers) for a couple of reasons. There are three indicators that line up to support this. First, the MACD at the bottom of the chart is at a historical peak. The arrows indicate that the MACD has reversed at these levels before. And you can see it starting to cross down, giving a sell signal again.

Second, the ratio itself is at the top of the channel. The channel is a channel because the ratio has reversed at the top in the past, no other reason. Finally, the RSI, another momentum indicator, is also peaking, in the overbought region. It is not a given that it will happen again, but the last time these three events lined up the ratio moved lower to the bottom of the channel. You might also notice that there is a mini event like this in 2013. This time the ratio only made it to the dotted minor resistance, but with the MACD and RSI peaks, it rolled lower to the support line of the channel.

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