Crude Oil poised to reverse

Crude Oil had a good rally last week. WTIC rallied off December low of USD35.13 to reach an intra-day high of USD50.47 on last Tuesday before correction set in. Its close at USD40.83 on Friday. Compared to other commodities, Crude Oil's downtrend seems to be intact (see Chart 1 below).


Chart 1: WTIC's daily chart as at Jan 9, 2009 (source: Stockcharts.com)

I have done some comparison between WTIC and two other indices, i.e. the Philadelphia Oil Services index and AMEX Oil Index. The Philadelphia Oil Services Index (ticker symbol OSX) includes 15 of the largest oil service companies involved in the drilling and servicing of marine and land oil and natural gas wells (go here for more). The AMEX Oil Index (ticker symbol XOI) includes 13 of the leading companies involved in the exploration, production, and development of petroleum (go here for more).

I have lined up the 1-year daily chart of WTIC, OSX and XOI below (Chart 2). From this chart, we can see that before the WTIC peaked in July 2008, OSX had begun to move sideway, while XOI had begun to move lower [see the pink lines]. This bearish divergence signaled a potential top in WTIC. Now, the opposite can be observed. We can see a bullish divergence [see the light blue lines]- with WTIC firmly trending lower, while OSX & XOI both recording a short-term uptrend (within a medium-term downtrend). A potential reverse in WTIC over the next 1 to 2 months is on the card.


Chart 2: The daily chart of WTIC, OSX & XOI as at Jan 9, 2009 (source: Stockcharts.com)

Based on the above, we should consider positioning in Oil stocks in anticipation on a reversal in Crude Oil prices. When this finally happens, Oil stocks would likely to receive a big boost.