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Oil-Service Stocks Now Look Cheap

NEW YORK ( TheStreet) -- A weak economy results in reduced demand for energy products, and this is reflected in the 19.7% year-to-date decline of in the price of Nymex crude oil.

Normally at this time of year the price of a barrel of oil would be pressured higher in anticipation of the summer driving season and the possibility that a hurricane could disrupt oil supplies in the Gulf of Mexico.

Because of weak energy prices, the oil-service stocks have followed crude oil prices lower.

Before looking at the oil services industry and specific stocks in the group, I will assess the risk/reward for Nymex crude oil.

The monthly chart for crude oil is negative, with the 120-month simple moving average a major rising support at $67.37.

The weekly chart is negative but oversold, with oil below its 200-week simple moving average at $80.51 and declining each week.

The 200-week moving average has been a magnet for oil since mid-2009. The daily chart (shown below) shows risk to the Oct. 4, 2011 low at $74.95. My downside target since May 25 has been achieved: my semiannual value level at $79.83.

chart courtesy of Thomson/Reuters

The benchmark I use for the oil-service industry is the PHLX Oil Service Sector index (^OSX). The index (recently at 187.29) actually led crude oil lower.

Oil peaked at $110.55 on March 1, while OSX peaked at 262.57 on Feb. 14.

The monthly chart for OSX is negative, and weakness this month has held just above the 120-month simple moving average at 184.26. The 120-month simple moving average also held in June 2010 and October 2011, so a monthly close below this moving average trend would be another technical warning for the energy sector.

The weekly chart for OSX is oversold with the index (like oil) below its 200-week simple moving average at 204.37. Between the two charts the neutral zone for OSX is between 184.25 and 204.37.

The daily chart for OSX shows declining momentum (12x3x3 daily slow stochastic) reading with the index well below its 50-day and 200-day simple moving averages at 211.88 and 225.47, respectively. There is risk to the Oct. 4, 2011 low at 174.66.

chart courtesy of Thomson/Reuters
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