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Advanced Technical Analysis - OSX



Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

The Oil Service Sector Index (OSX), comprised of 15 stocks, has potentially completed a massive corrective triangle from its September 2000 peak to the lows registered on November 24th 2003. If this interpretation is correct (and the technical evidence I present below and in the charts suggests it is), this interpretation implies that the OSX has an important projection point for this bullish bounce from the November 2003 lows of the 170-185 region sometime in the May-July 2005 period; a 50-65% move up in less than 12 months.

This bullish technical analysis rests on the assumption that a very large triangle correction has taken place from the 2000 top to the November 2003 low in the OSX. Triangle patterns, as I describe below, are very special Elliott wave patterns: their position and size allow traders to have high confidence in what seems to be improbable price action. In this case, the fact that a large corrective B wave triangle took three years to develop in the OSX implies that the OSX has started a very impulsive, very large move upward to the 170-185 area at least and should make that move in approximately ½ the time it took the B wave triangle to form in the first place. That means the OSX could see the 170-185 area by June 2005 if the technical indicators are correct.

The very short term suggests a multi-session correction back to important Fibonacci support in the 102-107 area where I fully expect prices to find support. A large uptrend could begin there, unless levels dip below 100, to a move to my cited higher targets. However, I believe there is ample technical evidence to support the call for the OSX to move substantially higher in the months and quarters to come, at least into the Q2:05 period and toward the 170-185 level at least.

The most important observation from the long term weekly chart (1998-present) is the formation of a 3 year triangle correction, from the 2000 peak to the November 24th lows in 2003. The highly overlapping, 3-wave movements both up and down strongly suggest a large triangle B wave was completing off the 2000 top. I have offered a bearish interpretation, but that count is far less attractive and far less confident. The bulk of the technical evidence rests with the conclusion that the 2000-2003 pattern was a completed B wave triangle correction.

There are a number of technical indicators that help confirm a triangle pattern: (1) internal phi relationships among alternate waves, (2) a momentum profile that oscillates in decreasing volatility around the MACD "0" line, and (3) collapsing upper and lower trendlines that are broken once the triangle ends. The weekly chart has all three. Wave (d) is equal to 0.63 times wave (b); the MACD line clearly oscillates back and forth, with decreasing volatility, around the "0" line; and the trendlines containing the triangle for three years have now clearly been broken to the upside (along with renewed momentum).

Triangles are special patterns in Elliott wave analysis for a number of reasons. First, they are the next-to-last pattern in a sequence, which means they show up right before the final move of a larger degree trend: as either B waves of a large ABC correction or as 4th waves in 1-2-3-4-5 wave impulses. In the case of the OSX, given the triangle here, I can confidently infer that the large 3 year triangle that ended on November 24th 2003 was a B-wave. If that is so, then a large impulsive wave similar in scope and magnitude to the "A" wave (that lasted from the February 1999 bottom to the September 2000 top) is now unfolding, having started in November 2003. The second interesting thing about triangle corrections is that, when they complete, the price move out of them (in this case, up) tends to travel the widest width of the triangle itself and does so in half the time it took for the triangle to form. In the case of the OSX, the widest width of the triangle was 85.80 pts and the triangle itself took roughly 38 months. That implies that the impulsive move up from the triangle in November 2003's 81.77 wave (e) low could take OSX prices to the 170 level around 19 months from November 2003, or in June 2005.

The last interesting aspect of this chart is that C waves and A waves tend to be related by phi: there are three most common choices: (1) C = 0.618 times A, C = A, or C=1.618 times A. In this case then, a minimum upside expectation for the C wave impulse out of the triangle is for C= 0.618 times A. Given the size of the move, we must use percentage terms rather than points. The A wave gained 205% from 1998 to 2000. If the C wave meets its minimum phi relationship to the A wave impulse, then C would gain 127% (205% * 0.618) from the November 2003 lows. That implies a C wave target of 185 for the OSX.

Based on the above technical considerations then, I have two targets for the OSX, 185 and 170, with a time target of June 2005 +/- one month for an ideal Fibonacci-based time and price target.

The weekly chart illustrates the fact that prices are near registering both a weekly "9" and "13" trend exhaustion indicator, which could, once triggered, provide several weeks worth of decline to lower support in the 102-107 area. As a result of this, and when combined with the daily chart (June 2003-present), I will be patient in looking for an upturn with the OSX here, as some sort of shallow correction is likely in the near term. If the bullish interpretation of this pattern is correct however, prices probably should not move appreciably below the 102-107 target range. I would then look for a large uptrend unless levels fall beneath 100.

The daily chart shows the pattern as it is unfolding: if the bullish interpretation is correct, once prices end their next correction in the 102-107 area, the upward move from that support could be dramatic indeed as it would be a wave iii of a wave III, or the most powerful trending part of an impulse pattern. If the bearish interpretation is operative, only a slight new high will be registered once the move off the May lows has been corrected downward. So the key to the bearish or bullish scenarios will be what type of bounce the OSX experiences from the 102-107 region. If it's fast and impulsive, the bullish count will gain greater credibility. If it is slow and labored and puts in only a mild new high, the bearish case could be operative.

The daily chart (May '04-present) shows that several daily Demark trend exhaustion indicators are ready to trigger in the next handful of sessions. This, when combined with the weekly Demark trend exhaustion indicators, suggests that patience will be better rewarded on an uptrend with a move to lower Fibonacci support in the 102-107 region. The possibility for an uptrend exists here unless levels decline past 100.

The hourly chart (June '04-present) shows that a correction is potentially near that could take prices to 102-107 support. As a result, I would not suggest a short-term uptrend right now but rather, will be patient and await a move to 102-107 area that shows some nice bottoming action in the form of hourly positive momentum divergence, some hourly Demark trend exhaustion indicators to the downside, etc. I'll publish notes appropriately once I think that the analysis may suggest this uptrend.

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