A Potential Reversal Lurks Over Oil’s Current Rally

When the oil price burst out of the blocks at the start of 2022, it wasn’t just the mainstream energy stocks that enjoyed the bull run…

Other related sectors, like oil services, also came along for the ride.

From early January to mid-April, the VanEck Oil Services ETF (OIH) rallied a whopping 70%. Then, after a pullback into May, OIH rallied again before topping out in early June.

However, momentum reversed course as the oil price fell sharply. OIH lost nearly 40% before bottoming out in early July.

When we looked at OIH on August 25 (red arrow on the chart below), it was recovering and in the early stages of a promising rally.

That rally petered out, and OIH fell back to support. Yet OIH has recently begun to climb once again.

So today, let’s see if this rally looks set to build further… or will crumble like the last…

A False Move

On the chart, the 50-day moving average (MA – blue line) shows OIH’s long-term trend…

We can see OIH began its rally from January 2022… then it rolled over and fell through August…

VanEck Oil Services ETF (OIH)

Source: eSignal

The reversal and sharp fall from OIH’s June high at ‘A’ coincided with the Relative Strength Index (RSI) forming an inverse ‘V’ right below overbought territory (upper grey dashed line).

As you can see by the red circles, this is a common RSI pattern that has preceded previous falls.

That down move from ‘A’ then accelerated with the RSI breaking straight down through support (green line).

However, as the RSI bounced along oversold territory (lower grey dashed line), selling momentum in OIH eventually waned. This enabled OIH to establish support along the orange line.

When we looked at OIH in late August, two technical signals underpinned OIH’s emerging uptrend after holding that support level…

1. The RSI had broken up through resistance and was starting to gain traction in the upper half of its range.

2. The 10-day MA (red line) had recently broken back above the 50-day MA.

As the chart shows, however, that proved to be a false move…

Take another look…

VanEck Oil Services ETF (OIH)

Source: eSignal

The RSI fell through support, and the 10-day MA crossed back below the 50-day MA. Likewise, OIH retraced lower, where it retested and held support again.

You can see that OIH’s hold on support coincided with the RSI forming a ‘V’ from oversold territory…

Since then, however, OIH has rallied strongly with the RSI breaking back into the upper half of its range. And the 10-day MA has bullishly crossed back above the 50-day MA and is accelerating higher.

So what can we expect from here?

Big Swings in Direction

The longer the 10-day MA continues to accelerate above the 50-day MA, the bigger this move will become.

But much like the oil price, OIH can turn on a dime. The big swings in the 10-day MA against the 50-day MA show how quickly OIH can change direction.

And that’s why I’m closely watching the RSI right now…

As you can see, the RSI has just gone into overbought territory. What happens around this level will be key.

If the RSI keeps tracking along or near this level, OIH could continue rallying – much like it did at the start of the year.

However, a strong reversal could see OIH’s current rally come to a quick end…

And much like it did when the RSI reversed previously (red circles), that could provide the setup for a potential short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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