Oil Services Stocks Could Bottom Out After Brutal DowntrendJune 11, 2019
The VanEck Vectors Oil Services ETF (OIH) has spent first six months of 2019 testing 18-year support in the lower teens and could turn higher soon, completing a double bottom reversal that yields the first uptrend since the fund topped out at a six-year high in 2014. It has dropped a staggering 76% since that time, dragging down industry giants that include Halliburton Company (HAL) and Schlumberger Limited (SLB).
Oil services decoupled from the crude oil futures markets in January 2017, turning sharply lower while those commodities gained ground through the first half of 2018. Profitability has failed to improve despite massive new supply since the presidential election, held back by poor fiscal discipline in a rising interest rate environment. However, the descent into the December 2018 low may have finally ended the downtrend, setting the stage for higher stock prices in the coming years.
OIH Long-Term Chart (2001 – 2019)
The fund came public in the upper $20s in February 2001 and broke short-term support at $24.50 in June, entering a steep downtrend that bottomed out at $13.93 in September. That marked the lowest low for the next 17 years, ahead of a bounce that failed at broken support in 2002. It finally cleared that barrier in 2004, entering a historic advance that continued into July 2008's all-time high at $76.25.
The price of OIH plunged during the economic collapse, dropping more than 70% in just six months, ahead of a recovery wave that stalled in the mid-$50s in 2011. The fund tested that level in 2014 and broke out but added just two points before turning tail in a major decline that picked up steam into the first quarter of 2016, when selling pressure ended a few cents above the 2008 low. The subsequent bounce attracted little interest, reversing in the mid-$30s after the presidential election.
The fund broke 2016 support in November 2018, entering a prolonged test at the deep 2001 low. It bounced at that level in January 2019 and posted modest gains into April when selling pressure returned, yielding a June retest that is still in progress. There are few signs of a major reversal so far, but looks may be deceiving, and market players should keep the group under surveillance, watching for a positive catalyst.
The monthly stochastic oscillator crossed into a sell cycle in January 2018 and posted the deepest oversold technical reading in the fund's history in December, setting of a contrary buy signal. The indicator has rolled over in the second quarter, in sympathy with the ongoing test at 2018 support. This type of crossover often triggers whipsaws due to the complexity of long-term downtrends, but it will be hard to argue with sellers if price drops to $12.50 in the coming weeks.
OIH Short-Term Chart (2017 – 2019)
The fund tested the 2016 low three times into October 2018 and broke down, dropping 50% into late December. The bounce into the second quarter of 2019 ended before reaching the 200-day exponential moving average (EMA), generating a support test that has now entered its second week. The weekly pattern shows greater potential than the daily pattern at this point, carving a small bull hammer that will be meaningful if the price can push above short-term resistance at $13.75.
The on-balance volume (OBV) accumulation-distribution indicator has been shedding buyers for years, but the latest distribution wave started in January 2018 and continued into the December low. It undercut that level in May and has hit an all-time low, requiring an uptick through the black line to improve the bearish outlook. Keep your powder dry until that happens and relative strength readings improve with a bounce back above the 50-day EMA near $15.50.
The Bottom Line
The oil services sector could bottom out in the coming weeks, but it makes sense to remain on the sidelines until more positive price action sets off preliminary buying signals.
Disclosure: The author held no positions in aforementioned securities at the time of publication.
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