Securities Research Services

Friday, February 22, 2008

Oil Rolling Over

The market's trading range continues.

Everyone surely sees the pennant formation that the S&P is trading in and as such, everyone is waiting to trade the breakout or breakdown of this pattern. Keep in mind that when everyone is looking at the same pattern, that pattern has a high probability of not working out the way everyone expects it to. It's best to avoid making guesses here and just react once the market shows its hand.

Meanwhile, oil rolled over on heavy volume after once again testing overhead resistance. A trip back to support looks likely here. And, with oil stocks continuing to diverge negatively against the price of oil, shorting the group looks like a good strategy while this market waits to make up its mind.


The current outlook now depends on the direction the continuation triangle pattern breaks. If it breaks to the upside, then we expect prices to rally into the falling 50-week average for a high probability shorting opportunity. If prices break lower, prices may retest January lows for a high probability buying opportunity.

*Until the market breaks one way or the other, a cash position is preferable. However, we see good shorting set ups in the oil sector right now and long positions that have been working well, continue to look good, so if you pick and choose there are some potential long side plays as well.

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