Which Way Will XOI Go?
Thomas Z. Tan, CFA, MBA
March 10, 2008
XOI is the American Oil Index composed of 12 large oil companies such as Exxon Mobile. There has been some interesting price behavior lately on XOI. And it seems that XOI is at a critical point right now. Which way will it go, up or down from intermediate term perspective? The chart below shows the 4-year XOI price movement, as you can see, the 250 EMA have been providing good support. XOI correlates with both oil and general stock market. When both XOI and S&P had been going well during last several years, it is not surprising that XOI had been also at a well defined uptrend. However, in January, XOI dipped below the 250 EMA support by quite a margin, due to the crash in the equity market. But it has recovered quickly when S&P rebounded back and oil soared. Right now, however, with deteriorating equity market, XOI again seems to be at the critical 250 EMA support of 1,370.
Courtesy of BigCharts.com
Courtesy of BigCharts.com
From the following chart, an alarming pattern has emerged. XOI seems to be in either 1) double top pattern (July and Dec 07) or 2) a head and shoulder pattern (Oct & Dec 07, and Feb. 08). No matter which one you pick, they both give a downward target slightly below $1,000, where we should get some support from 2006. Will XOI drop 1/3 from this point?
Courtesy of BigCharts.com
Let us look at another chart which might help us answer this question. The following chart has both DJIA and XOI plotted together. You can see XOI has actually performed better than DJIA. This is not surprising since oil has been on fire lately. You can also see the double top at DJIA from last year, which gives a downward price target of 11500. It is likely that DJIA is going there very quickly right now, even this week. It won’t surprise me that XOI will follow suit in sympathy. But if DJIA reaches 11500, will XOI be below 1000? I doubt it, unless there is a crash in oil market at the same time. The reason is XOI made higher high last Dec while DJIA made lower high, reflecting a relative strength. At the same time XOI Jan low is about the same level as August low while it is not the case for DJIA, again reflecting a relative strength. This leads me to believe even if we have a crash in stock market this month, XOI will drop but probably not at the same proportion as DJIA or S&P. This makes sense since XOI is closely correlated to both stock market and oil. If oil can hold up well, it will provide a necessary cushion to XOI while general equity market is trying to hammer everything down. So it might be a tug of war for XOI.
Courtesy of BigCharts.com
Double top and head & should patterns are scary, but they don’t become valid until the neckline is broken. Sometimes even the neckline is broken, it becomes a fake break out. Right now, XOI has still some way to go before it reaches the neckline. So we will see what happens. In general, I believe even XOI is under some short term pressure, in general, as far as oil remains strong, XOI might perform relatively better than the general equity market and provide some capital protection and cushion from a general stock market meltdown. And when market finally recovers in a bear market rally, combined with strong oil, this sector can shine again. However, if oil starts falling back to the $80 level, combined with a stock market plunge, then I think we will see the downside price target of below $1,000 for XOI implied from the current head and shoulder pattern./P>
Thomas Tan, CFA, MBA
Thomast2@optonline.net
Those interested in discovering more about me, my trading strategy and reading many of my other blogs can visit web site at www.Vestopia.com/thomast
Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.
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