Three Charts To Ponder: Oil Services, Oil, and the Pound

by: Market Folly August 22, 2008 | about stocks: DBO / EGB / FXB / GBB / IEZ / OIL / USL / USO / XES    

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Circling through some of my favorite blogs, I found some charts worth posting up here in what I like to call the 'Technical Analysis Round-up.' Longer term readers will know I like to reference charts simply because its a great tool to have in your investing arsenal. While I like to make investment decisions based on fundamentals, the technicals (a.k.a. the tape) can often provide additional insight to aid you in your quest. The fundamentals determine the 'why,' while the technicals determine the 'when' and 'how.' Glancing at a few charts can more often than not give you a great view of the price action surrounding some macro occurrences. Paying attention to volume, divergences, price patterns, and especially trend lines can provide you with great risk/reward setups. I'm not here to start a debate on fundamentals versus technicals because those arguments go in circles. I simply use both tools because they both offer unique information. If you're looking for reasons as to why you should pay attention to both the fundamentals and the technicals, then I will simply point you to interviews with some well known hedge fund managers that I've posted here and here.

Now, on to the Technical Analysis Roundup. First, over on Stewie's blog, he has a chart up of the Oil Services Index that shows a test of a long term trendline. This trendline can serve as a great entry into an easy risk/reward play. Buy the dips in oil service names as it approaches the trendline. Place your stop just below the trendline in case it is broken to the downside. Very simple risk/reward play that takes emotion out of the game. Oil will probably need to see some strength for the oil service names to take off here.

(click to enlarge)

And, unsurprisingly, the chart of oil has a similar setup, as detailed on

Steve Puri's blog

. As you can see, oil has a very similar setup in terms of risk/reward. You have an easy entry and a crystal clear area to place your stop. If the selloff in oil continues, your stop gets taken out and you move on to the next idea. Oil has traded very well on a technical basis and I would expect that trend to continue. Given the volatility in all markets recently, everyone is looking to the technicals as a guidling light. Although the action in the underlying commodity is driven by fundamentals, it has traded very technically sound. Just like the oil services, we see an opportunity for a very defined risk/reward setup with clear entry and exit points.


(click to enlarge)



Lastly, I want to highlight a chart posted over on

Kevin's Market Blog

. There, Kevin examines a major long-term trendline being violated in the British Pound. The British Pound has declined in value for fundamental reasons. Among them, a stronger U.S. Dollar, and an overall weakening environment in England and Europe in general. This fundamental decline in the currency is illustrated by the latest major drop on the chart. And, at the same time, technicians will tell you that since the trendline is broken, a short position in the Pound might be advisable. And, at the very least, technicians would have exited any long positions in the Pound once that long term trendline was broken.


(click to enlarge)

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This article has 10 comments:

  •  
    Aug 23 10:43 AM
    Feel free to draw lines wherever they fulfill your predictions. And don't foget to only use the Time Frame required to allign them.
    Reply | Link to Comment
  •  
    Aug 23 10:48 AM
    PS I can't help but notice the absense of any trendline on the oil chart. Nor do I understand the relevance of using the Brit. Pound instead of the Euro.
    Reply | Link to Comment
  •  
    Aug 23 12:06 PM
    To paultaut: British Pound has been historically since 1974 a "petro currency". That maybe why they used it.however,the Pound is less and less a "petro currency" due to a declining North sea production base.

    So your point is well taken,the article does not explain the use or reasoning behind the Pound's inclusion here.

    A better currency is the Canadian Dollar with a CadJpy ratio. The Canadian Loonie vs. the Japanese Yen. That would have been far more appropiate here.
    Reply | Link to Comment
  •  
    Aug 23 02:42 PM
    paultaut, if the information is not useful to you, then don't bother to read it... simple as that.

    and steve ward, the pound chart is uncorrelated to the oil charts. was just pointing out another technical breakdown that occurred. the 3 charts were just glances at the technical side of things... just so happens that the first 2 charts both had to do with oil in some capacity.
    Reply | Link to Comment
  •  
    Aug 23 03:06 PM
    Charts, smartz! The only thing to consider is reality in the present. If the Dems get their hats handed to them in November, as they should, after two years of screwing up the economy and using blather and mindlessness as their tools, the Repubs must show they are, truly, dedicated to establishing energy independence for the nation by implementing their promise of Drilling Here, Drilling Now, and Paying Less. Then, oil prices will plunge below $70, as low as $50(?), and the chartists will have cornered the market on toilet paper.

    If there is any intelligence in the electorate, so shall it be. If not, there is no hope for this nation. But never fear, the chartists will show us the way to oblivion.
    Reply | Link to Comment
  •  
    Aug 23 05:49 PM
    Please tell me how I would be expected to know That the Pound is included only for show? The Charts are Useful, the trendlines and expectations therefrom are only in the "eye of the Person" drawing them and making inferences from them.

    If there is no reason to include the Pound, why include it? I called the CRB to hold 380 and oil $110-111 weeks ago. Using long term 40 year charts on the CRB and 5 year oil, Oil is an almost perfect Fib. retracement which was supported by a trendline connecting the tops of last 3 years and extending same into the present.

    You don't like my comments, don't read them. Those people who write Articles just to attract the attention of people who agree with whatever is written, should only post them on their own Web Sites.

    Take the Pound, just from the Chart provided, I would draw a line connecting the two tops shown and a Parallel line which ...gee, there is no breakdown. The Pound is still holding within an uptrend and now has 3 points of support.

    Charts involve mechanical input but artistic interpretation. I am sorry if my mechanical input goes against your artistic interpretation.

    Reply | Link to Comment
  •  
    Aug 23 06:11 PM
    Oh, leh, why don't you have your options trader take a look at the Charts posted here so he can tell you his interpretation. Then you can come back with an explanation which will derail not only mine but also "folly's" interpretation.

    Charts are used to attempt to divine the future from the past. Meanwhile Commodity traders are more likely to use Fibbonaci and MACD rather than charts for short term fluctuations. There are no fixed relationships otherwise there would not be so many charting services.

    I have been Charting since 1974, I've lost more options trades than I have won. Ask the options trader about his percentages. Not whether he is making money overall, just win/total percentage.

    If you can't take the heat, stay out of the Kitchen.
    Reply | Link to Comment
  •  
    Aug 24 01:39 AM
    I made my call on the CRB 2 weeks ago, On oil, about 3 1/2 weeks ago. Look it up.
    Reply | Link to Comment
  •  
    Aug 24 07:38 AM
    Anyone who cares to pay attention would know the housing slump has seemingly reached British shores now and thus a slump in the pound is an expected outcome. Therefore acting on this chart which was wisely included IMO is probably a prudent course of action at the present time. A trendline drawn along tops indicates resistance, yes?
    Reply | Link to Comment
  •  
    Aug 24 02:52 PM
    highmax:

    Yes, thats why most Chartists use Parallel lines to emphasize the channel of a given Chart, if one exists. Breaking out of that channel, either direction is significant. Another useful application is the use of the Bollinger Band which is often used as a substitute when a Clear Channel isn't established.

    I go to BIGCHARTS.com and utilize Bollinger, Volume, MACD and Cash Flow on a normal everyday basis. If I want to play games with the pretty pictures, I will print the chart and start drawing. Elliot Wave, Gann, Fibbonaci are all more advanced but the simplest is Fib.

    Reply | Link to Comment
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