Amid all the carnage in the markets last year, there was one sector that enjoyed a mighty run…

A huge rally in the oil price saw multiple oil and gas stocks reach their all-time highs.

However, it wasn’t just mainstream producers like Exxon Mobil (XOM) and Chevron (CVX) that enjoyed the huge boom.

The sector that supports the oil industry – the VanEck Oil Services ETF (OIH) – rallied a whopping 70% in the first half of 2022.

However, after that strong rally, OIH retraced heavily mid-year… before beginning its next rally in late September.

On October 27, that rally’s strength had put OIH on the verge of overbought territory.

So today, we’ll see how things panned out and what we can expect from here…

Building Short-Term Support

On the left-hand side of the chart, you can see OIH’s strong rally that topped out at ‘A.’

OIH then reversed sharply when the Relative Strength Index (RSI) formed an inverse ‘V’ (red circle) and fell from near overbought territory (upper grey dashed line)…

Take a look…

VanEck Oil Services ETF (OIH)

Image

Source: eSignal

As the other red circles show, this inverse ‘V’ is a recurring and tradeable pattern. It leads to OIH retracing.

After the RSI inversed at ‘A,’ it then broke down through support (green line). And the down move in OIH gained traction.

OIH then bottomed out with the RSI bouncing along oversold territory (lower grey dashed line).

Next, it had a failed move higher in August in which the RSI was unable to maintain its position above resistance.

After that, OIH bottomed out again in September along support (lower orange line). And the RSI made a ‘V’ in oversold territory.

When we looked at OIH on October 27 (red arrow), the RSI had rallied right across its band (from oversold) and was touching overbought levels.

Take another look…

VanEck Oil Services ETF (OIH)

Image

Source: eSignal

Another bullish sign followed that strong up move, as the 10-day moving average (MA – red line) broke past and accelerated above the 50-day MA (blue line).

At the time, I wrote that the direction of the RSI would be key to OIH’s direction…

If the RSI kept tracking along this overbought level, OIH could keep rallying. However, any strong RSI reversal would likely see OIH’s rally come to an end.

As you can see, the first scenario played out…

OIH only reversed at ‘B’ when the RSI and stock price started diverging.

Since then, the RSI has mostly stayed in the upper half of its band aside from one brief fall below support. That has helped OIH to build short-term support (upper orange line).

However, with the RSI now testing that support level again, what can we expect from here?

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Both Support Levels Are Linked Together

Right now, the support levels in OIH’s stock price and the RSI are tied together…

For OIH’s rally to continue, we’ll want to see the RSI hold its support and then continue to track in the upper half of its range.

If the RSI breaks below its support level, then OIH will likely fall below its own support level too. The longer the RSI can track in the upper half of its range, then the longer any potential rally could be.

The other indicator I’m watching is our two MAs…

After tracking along the top of each other in December, the 10-day MA finally broke above the 50-day MA earlier this year.

If the 10-day MA can accelerate from here above the 50-day MA, then that’ll add further proof of OIH’s emerging rally.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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