Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
As inflation continues to climb, one key component adding to the rise in costs – and hitting motorists in the hip pocket – is the price of gas…
For a commodity supposedly on the way out, you’d expect oil prices to fall. However, gas prices are now almost 60% higher than they were a year ago.
While that might be good for oil companies, the better news for motorists is that the recent rise in the oil price looks to be losing momentum. After taking out its November highs, the six-week long oil rally is struggling to move higher.
A drop in momentum, however, won’t only put a lid on oil stocks…
As the chart below shows, it will soon also test the rally that got underway in oil services – a sector that provides support services and equipment to oil producers.
When we last checked in on VanEck Oil Services ETF (OIH) (red arrow), it had just completed a major reversal pattern. That head and shoulders pattern completed when OIH hit support (lower green horizontal line)…
VanEck Oil Services ETF (OIH)
OIH needed to break below that support level to trigger a short trade…
However, OIH bounced off this support (lower green line).
This coincided with the Relative Strength Index (RSI) indicating OIH to be oversold. OIH then re-tested support again on December 20 before rallying into the new year.
So what am I looking for next?
In both June and October last year, the RSI went into overbought territory (above the upper grey line). These peaks in the RSI corresponded with highs in the OIH share price…
In June (A), OIH hit just over $248 before retreating. And then in October, OIH peaked at just under $230 (B) before retracing again. The key takeaway is that the high at ‘B’ was lower than ‘A’.
With the RSI again closing in on overbought territory – and OIH about to test resistance (upper green line) – the price action around ‘C’ becomes key.
If the current price action peaks around this resistance level, then that means OIH will have formed a series of lower highs… And that’s usually a bearish signal.
A rebound lower off resistance, along with the RSI forming an inverse ‘V’ (in overbought territory), could see a quick and sharp move lower. And, that would once again bring OIH’s support level at around $170 back into play.
Remember that the longer a support or resistance level holds, the stronger those levels become. And, the bigger deal it becomes if either of those levels are broken.
If OIH breaks below support – a level it held for almost a year – then a much bigger down move could be in the cards. And that could provide the opportunity to go short.
We’ll also need to see the short-term 10-day moving average (MA – red line) cross back down below the 50-day MA (blue line) before this down move comes into play.
VanEck Oil Services ETF (OIH)
However, if OIH continues to keep testing (and holds) support, then something has to give. So, the likelihood increases that OIH will eventually break out above its resitance.
For now, we’ll wait and see.
That’s why the action in OIH will be important over the coming week. Not just in the setup for potential trades, but its wider impliations for inflation.
As always, I’ll be keeping a close watch and will be in touch if there’s anything I think you should know.
Editor, Trading With Larry Benedict
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