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Is Crude Oil a Step Behind or Ahead of the Oil Index?

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The outlook for oil stocks remains bullish and the uptrend is not threatened at the moment.

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Now that we know the current situation in the medium term, let's focus on the relationship between light crude and the oil stocks.

When we take a look at the above charts and compare price action in both cases, we clearly see that oil stocks were stronger in the previous week once again. They closed higher for a fourth week and remain above the July peak (in terms of weekly closing prices). What happened with the price of crude oil at the same time? Light crude declined and closed lower for a third week. Additionally, it dropped to a new September bottom on Wednesday, which clearly shows its weakness in relation to the oil stocks.

Now, let's turn to the daily chart.



As you see on the above chart, the situation didn't change much in the previous week. After a breakout above the declining resistance/support line based on the May and July highs, the oil stock index remains in the consolidation. At this point we should consider two scenarios. If the buyers manage to push the XOI above the September high, we will likely see another upward move, which may result in a breakout above the May high.

On the other hand, this strong resistance may encourage sellers to go short. In this case, we may see a corrective move to at least 1,400. If the oil index drops below this level, we could see further declines .

Please note that the nearest support is the bottom of the current consolidation (the 1,400 level). The second one is the previously broken declining resistance/support line (around 1,396), the next one the 50-day moving average (currently at 1,389.56). Going even lower, we have a support zone based on the August 27 and August 30 lows (1,361-1,364), and a further one based on the August 21 bottom and the 61.8% retracement level (1,338-1,339).

Before we summarize, let's look at the relationship between the WTI and the XOI in the short term. This time, we see a negative divergence between the price action in light crude and the oil stocks. Although we saw declines on Monday (in both cases), the rest of the week looked completely different. We've been seeing a consolidation in oil stock in the recent days and the NYSE Arca Oil Index is trading between the September 18 low and the September high. Meanwhile, in the case of crude oil we saw further deterioration which resulted in a new monthly low.

Summing up, from the long- and medium-term perspectives, the outlook for oil stocks remains bullish and the uptrend is not threatened at the moment. The oil index closed higher for a fourth week and, what's most interesting, this was its highest weekly close since June 2008. Additionally, if the buyers manage to hold the XOI above 1,400, it will be the highest monthly close since June 2008. Meanwhile, crude oil not only lost its major allies (the 50-day moving average and the short-term rising support line), but it also declined below the medium-term rising support line. Additionally, the breakdown is confirmed and light crude has hit its new monthly low. Taking into account the relationship between light crude and the oil stock index in the previous week, we can conclude that the oil stocks remain stronger in relation to crude oil.

For the full version of this essay and more, visit Sunshine Profits' website.

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 SunshineProfits.com where she publishes her articles on gold and crude oil trading.


Twitter: @SunshineProfits
No positions in stocks mentioned.
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