Oil Services Sector Treading Major Support Level

After being bludgeoned in the back half of 2014 (to the tune of -35%) along with all oil-related assets, the Philadelphia Oil Services Index (OSX) has twice this year tested a major line of support. After bottoming just under 100 during the last oil crash in 2008, the OSX hit a high of 312 on July 1 of last year. That places the key “Golden” Fibonacci Retracement level at precisely 179. The OSX made a 3-year low on January 29 at 178 before bouncing 17%. Subsequently, the index dropped back to test the level again, bottoming at 179 on March 16. People wonder why we look at Fibonacci levels in our work. It is because they are effective, as the OSX experience would attest (not to mention the largest investment houses in the world use them).

So what now? It is pretty straightforward. Above the 179 line may be bullish for the OSX and below it, bearish. We are not making a call either way – and don’t see the need to. The OSX is certainly washed out enough to support at least a temporary bottom and a counter-trend rally. Thus, if the OSX either holds 179 or breaks it and immediately recover it, it has potential to launch a sizable rally. The previous breakdown area around 230, which also represents the 38.2% Fibonacci Retracement of the 2014-2015 decline (as well as the underside of the previously broken up trendline and potentially key moving averages), may be a magnet for any bounce. That would be a 25% move from these levels.

On the other hand, if this 179 level gives way, there is risk for substantially more downside. Even though the oil commodity and oil equity sectors are extremely oversold, the break of this major line could open up the floodgates. And while that may be only a short-lived capitulatory decline, it could be vicious – of the waterfall variety.

This line has major implications for those in, among others, the popular OIH ETF. We would be watching the 179 level on the OSX very carefully if holding the OIH.

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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.