As Oil Heads to $90... or Back to $70 (USO, OIH)

Now that oil has bested the $82.00 per barrel mark and rallied about 15% in six weeks, investors are trying to figure out what is next.  We are tracking the the United States Oil (NYSE: USO) and the Oil Services HOLDRs (NYSE: OIH) as the key ETFs for this move.  Iraq has just now forecast that its oil field proven reserves have been increased from 115 billion barrels to 143 billion barrels.

Our technical analysis affiliate is Adam Hewison of INO and he has noted, “…Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near-term. If November extends the rally off last week’s low, the 87% retracement level of August’s decline crossing at $82.41 is the next upside target. Closes below the 20-day moving average crossing at $76.69 would confirm that a short-term top has been posted.  First resistance is the overnight high crossing at $81.08. Second resistance is the 87% retracement level of August’s decline crossing at $82.41. First support is the 20-day moving average crossing at $76.69. Second support is last Thursday’s low crossing at $73.58.”  Those trade triangle alerts can be sent directly on a live basis when changes occur from INO.

The key oil commodity ETF is the United States Oil (NYSE: USO) and its shares have rallied from under $32 in early September up to almost $36 at the start of October.  That makes gains of about 12% in a month for the USO.  The move has been equally impressive in the “drillers and services ETF” via the Oil Services HOLDRs (NYSE: OIH), where shares rallied from under $98 at the start of September to as high as $114.00 before the small pullback off highs took shares to under $112 this morning.  That puts the oil companies ETF up over 15% as well before the profit taking.

The big issue is this… Oil has traded in a band of $70 to $80 for long enough that most investors are getting conditioned to hit the sell button above $80 and to hit the buy button under $70… The fundamentals always matter, but for whatever reason that trade has worked over and over.  Until a drastic change is marked, it seems a tough sell that $90 oil will be here tomorrow.  Just remember one adage that all technicians keep as a caveat: trading ranges work, until they don’t.

JON C.OGG