It’s in Their Nature

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A few months back, I wrote several posts, seemingly in vain, exhorting you to respect the significant supply that the OIH (ETF for Oil Services) was running directly into on a monthly timeframe. Back then, there were all sorts of arguments I would hear as to why multi-year significant price zones would be deemed irrelevant in this case, whether it be the looming Middle East supply disruptions or Dr. Bernanke’s hyperinflation wonderland putting crude on a straight line towards $200 a barrel, dragging energy-related stocks along for the ride higher. At any rate, the overhead technical supply held true to form. Why? Because it is in the nature of the market to ultimately respond to what has been deemed to be prior significant price areas.

Fast forward several months later, and we are looking at what is highly probable to be a mid-cycle slowdown within an overall bull run which began in the early spring of 2009. With the $160 area proving to be key once again, a continued pullback to the low/mid $130’s is entirely within the realm of possibilities. That said, the dangerously overbought conditions of early 2011 here have already been sufficiently worked off, and the correction can end at any time.

However, the main point is that the bull is still firmly intact, and my call several months back was simply for an intermediate-term slowdown. On the monthly chart below, you will note that this recent consolidation is only the second extended base that the OIH has formed since early 2009. Again, given that the Oil Service stocks are clearly still in a cyclical bull, the most probable outcome is an eventual break higher above $160 after the consolidation runs its course in the next few months. Compare current price conditions to the 2001-2008 bull run that the OIH had, and how many bull market corrections along the way it saw before it reached a bonafide tipping point.

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