Oil and oil service stocks clearly predicted the top in oil as far back as early March, when the oil (XOI) and oil service (OSX) indexes failed to confirm the new highs in the futures prices.
It's also important to remember the hype that surrounded the Goldman Sachs analysis, released a couple of weeks ago that was calling for oil prices at $105. On April 1, in this space, we voiced our doubts about the Goldman Sachs report: "What makes the analysis somewhat questionable, in our opinion, is that the oil markets move more on supply than demand. Second, the global economy is starting to slow. With OPEC still pumping full tilt, if the global economy slows, then demand will likely slow. To us it sounds as if the potential for an oil glut, not a catastrophic shortage is at least as likely a scenario. To be sure, there is still plenty of demand, especially in China and India. There is also a bottleneck in U.S. refinery capacity. And yes, the world is different after 9/11. But, you'd think that at $55 plus dollars per barrel, the market would have priced in a whole lot of stuff, already. In fact, there are some things in the timing and content of the announcement that have a bit of a nasty ocean breeze smell to them. According to Reuters: ["Goldman Sachs is the biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a widely-watched barometer of energy and commodities prices."]
At this point, the decline in oil remains in the correction class, given the scope of the bull market that we've been in. Until the 200 day moving averages on futures contracts get taken out convincingly, we remain in a long term up trend in oil, and in our opinion, we are not very likely to see oil below $40 per barrel for some time, unless something very dramatic happens, such as a collapse of the Chinese economy, which as we've stated numerous times (see our archived IQ reports) is a plausible scenario.
Investors should remain wary of the oil market, and should use extreme caution in any exposure there. Aggressive traders should be short at this point.
The Philadelphia Oil Service Index (OSX) has also broken key support. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) is in deep technical trouble in the short term. The index could be headed for the 750 area in a hurry.
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