By: Chris Rowe — September 15, 2017
Today I'm going to show you one Sector ETF that represents an industry that had been beaten all to hell. But this month, it became the strongest sector in the stock market.
It's part of the most hated group in the market, so you might laugh at me for calling it a screaming buy. Do understand that your laughter gives me much comfort.
I'll start with a few simple price charts so everyone can easily absorb what's happening.
The second part of what you're about to read gets a bit more sophisticated.
In order to clearly see the "true market," I use something I call my "monster-fund surveillance system," which clearly shows me three things:
To see what I mean, let's dive into some basic technical analysis of the Oil Service sector...
Oil Service companies, like Schlumberger (SLB), Halliburton (HAL) and Transocean (RIG) - you guessed it - offer services to Oil companies.
Below is a 5-year weekly chart of VanEck Vectors Oil Services ETF (Symbol: OIH).
The "weekly" part is a key point, because the technical study/indicator you see at the bottom is based on 14 weeks of data, as opposed to the same indicator on a daily chart, which would be based on 14 days of data.
Viewing the indicator, called the RSI (relative strength index), on a weekly chart shows us long-term momentum changes in this particular fund.
After the sector fund lost about 64% of its value (from mid 2014 to January 2016), it found a bottom near $20.00 before rallying about 75% in a year.
(By the way, at the January 2016 bottom my "monster-fund surveillance system" alerted me to the fact that institutions were buying the crap out of this sector.)
And the signal we've just gotten from that system is now telling me the very same thing. More on that in a minute.
See the green diagonal lines on the chart? They show a "positive divergence" between the weekly RSI (momentum indicator at the bottom) and the price of OIH.
This is a very strong indication of a major bottom and we have just seen it happen once again.
In the 3-year weekly chart, above, I've pointed out the exceptionally low volume in August, as OIH bottomed out.
Remember, "volume equals validity," so the price/volume action is telling us that major investors have "agreed" that the fund should not have been trading at such a low price.
In other words, the low volume traded when OIH was at that price indicated the price was not "valid".
We can see the volume in more detail in these 1-year daily charts.
The volume bars represent the volume for each day, as opposed to the volume for each week in the previous charts.
Again, "volume equals validity."
Notice how, as the price of OIH jumped from the low-volume August lows, it did so on triple the average daily volume (blue arrows).
Then, as OIH pushed above the key downtrend line (orange), it again did so on above-average volume.
The "resistance levels," such as downtrend lines and the historical resistance price points, are "known" by the computers that trade this fund.
As demand pushes the price of the fund up past those resistance levels, more and more computers begin executing pre-programmed buy orders. This happens as OIH further proves its strength.
At the early stage of a reversal, like this one, buying into it is considered to be aggressive. There may be sharp moves higher and lower in the early stages. Once those resistance levels are taken out, the investing worlds becomes more confident.
When you look at a chart like this, your first reaction might be to wonder whether or not this fund has sufficient strength to break above resistance levels.
To answer that question, I know of no better resource than Sector Prophets -- my "monster-fund surveillance system."
Let's see how we can use it to find those three things I mentioned earlier:
Again, the Oil Service sector will serve as our example.
First, as a reminder, the two key things to focus on when you're assessing any group of stocks are: the "internals" (a.k.a. the "True Market", which tell you the risk level and whether supply or demand is in control)...
... and the "relative strength" (which tells you what the current and likely velocity of the price movement is).
The BPI is the granddaddy of internal indicators. As you can see, Sector Prophets shows the Oil Service BPI with a "Bull Alert" (oversold with demand in control).
This signal was triggered Wednesday (far right column, highlighted in yellow).
When the indicator has a strong move higher, a new X-column (up column) is created.
You can see the months within the columns denoted by the numbers. Also note that this indicator is delineated in terms of the percentage of all stocks in the sector. For that reason it oscillates up and down between 0% and 100%.
The reading is at 20.79, meaning 20.79% of all Oil Service stocks are on "buy signals."
If it gets up to 22%, another "X" gets added to the cop of the most recent column (far right). That would change the indicator from "Bull Alert" to "Bull Confirmed" -- an even more bullish signal.
We know that bulls (the demand side) are in control of the sector's price movement. The fact that the bullish column-change happened at a very low region of this chart indicates a very low-risk buying opportunity.
Take a look at the exact opposite signal (the red arrow on the OIl Service BPI, above). That occurred in January of this year. After a long X-column (up) to a very high level (high-risk level), we got a reversal down to an O-column.
This was a clear bearish signal that monster (and monstrous) funds had begun distributing their stock to unsuspecting investors.
Now look at what happened to the price of OIH from that point on (from the red arrow on the right).
And look at what happened to OIH (red arrow on the left) after the Oil Service BPI gave the same exact bearish signal back in July 2014 (blue arrow on the BPI chart ).
So, on the chart, above, I point out when the two extreme bearish signals were flagged by Sector Prophets (red arrows), and I also point out when the two extreme bullish signals were flagged by Sector Prophets (blue arrows).
Every now and then I'll post some of the findings in Sector Prophets but to be fair to our Sector Prophets subscribers, this can only be every once in a while. I hope this helps.
See you soon!