In our previous essay, we examined one of the most interesting
relationships in the crude oil market - the one between oil stocks
and other stocks, to find out if there's something else on the
horizon that could drive oil stocks higher or lower in the near
future. Back then, we wrote that there were periods of time when
S&P 500 Index
(INDEXSP:.INX) was stronger than the oil stock index and that such
divergences had triggered declines in both indices before.
Since that essay was published, we've seen similar price action. In
the previous week, the S&P 500 index broke above the previous
high and hit a fresh all-time high. Meanwhile, although the
NYSE Arca Oil Index
(INDEXNYSEGIS:XOI) moved higher, the move ended slightly below the
Nevertheless, on Monday we saw further improvement and both indices
hit their new 2013 highs. However, after that they declined. Will
we see further deterioration? Before we try to answer this
question, we'll examine the XOI to find out what the current
outlook for oil stocks is.
Let's start with a look at the monthly chart of the oil stock index
(charts courtesy of
On the above chart, we see that the situation has improved recently
and the XOI still remains above the upper line of the rising wedge.
Quoting our essay on oil stocks and crude oil from Oct. 30, 2013:
The breakout, however, is not yet confirmed. (…) in this area
there's a very important Fibonacci retracement level - 78.6% (close
to 1,467) based on the entire May-October 2008 decline, which may
slow the rally. However, if the buyers don't give up and manage to
push the oil stock index above this resistance, we will likely see
Looking at the above chart, we see that the breakout above the
78.6% retracement level encouraged buyers to act and resulted in a
new 2013 high at 1,489. From this point of view, the situation is
To see the current situation more clearly, let's zoom in on our
picture and move on to the weekly chart.
Looking at the above chart, we see that the oil stock index bounced
off the bottom of the recent corrective move in the previous week,
which resulted in a sharp pullback. With this upward move, the XOI
came back to slightly below the October high. On Monday, we saw
further improvement and the oil stock index climbed to a fresh 2013
high at 1,489.
In spite of this growth, the breakout above the previous high is
Please note that the upper line of the smaller rising wedge (marked
with the black line), which successfully stopped growth at the end
of October, is still in play. As you can see on the weekly chart,
the XOI remains below this line, which serves as resistance
(currently around 1,495). Additionally, the RSI moved above the 70
level, which may trigger a corrective move in the near future -
similarly to what we saw in the previous months.
Nevertheless, from the technical point of view, the medium-term
uptrend is not threatened at the moment, and the situation remains
Now, let's turn to the daily chart.
Looking at the above chart, we see that the oil stock index didn't
manage to break above the 78.6% retracement at the beginning of the
previous week, which resulted in a decline in the following days.
As you see on the daily chart, this downward move took the XOI to
slightly above the bottom of the recent corrective move. On
Wednesday, this support level encouraged buyers to act, which
resulted in a pullback. In this way, the oil stock index broke
above the 78.6% Fibonacci retracement level and almost reached the
2013 high on Friday.
On Monday, we saw further improvement, and the XOI hit a new annual
high at 1,489. However, after this positive event, we saw a
correction which pushed the oil stock index slightly below the
previously-broken high. In spite of this drop, the breakout above
the 78.6% retracement level was confirmed, which is a strong
Summing up, from the long-, medium- and short-term perspectives,
the outlook for oil stocks remains bullish and the uptrend is not
threatened at the moment. However, taking into account the
combination of a strong resistance level (the upper line of the
rising wedge) and the position of the RSI, we should keep an eye on
the oil stock index because the sellers may lock profits and
trigger another correction in the coming days.
For the full version of this essay and more, visit
Nadia is a private investor and trader, dealing in stocks,
currencies, and commodities. Using her background in technical
analysis, she spends countless hours identifying market trends,
major support and resistance zones, breakouts, and failures. In her
writing, she presents complex ideas with clarity that enables you
to easily understand market changes and profit from them. You can
read Nadia's analyses at
where she publishes her articles on gold and crude oil