Yesterday on his show Mad Money, Jim Cramer featured "Off the Charts" analysis of my OIH long inverse head and shoulders play, which forecasts much higher prices for the sector. Below you can see the clip as well as our own analysis of the ETF and two of our favorite stocks in the sector.
The Oil Service HOLDRs ETF (OIH) is one of the strongest sector ETFs today, and it looks like the macro inverse head and shoulders pattern could trigger sooner than we initially thought.
The Inverse Head and Shoulders is bullish bottoming pattern. Right now it is in a process of accumulation as the "Right Shoulder" forms. Since buying for momentum and trying to get follow-through on trades has been difficult in this market environment, perhaps a more calculated accumulation pattern is best as we head into 2012. We can start to use a tier system too maneuver the trade for 2012.
This pattern triggers with a move through and a close above the neckline, which stands at $132-133. This pattern measures distance from the Head to the neckline, which is about 30-35 points. The measured move gives this trade a target $160-$165. This pattern has taken about 5 months to form so far, so it could take 5 months to achieve the measured move.
Using my Tier System, you could be positioning into a Tier 1 as the Right Shoulder forms in the $115-$120 area. This buy is in anticipation of the pattern. Use $108 as your stop on this tier. This is a comfortable level to get involved to keep the trade on your radar.
You could then add to the position above $127-128, the recent pivot high, to get into a Tier 2. This signals that the group is getting stronger and the pattern is starting to work.
The last add, to get into Tier 3, is a break and close above the neckline around $132-133.
By using a tier system it helps you develop a nice cost average, and then you can take profits in the same manner. When the pattern ignites you can then sell a tier, or half tier, as it hits the $140-145 resistance zone. It is healthy psychologically to book some profits along the way, and then hold the rest to the completion of the measured move of $160-165.
In this trade, there is risk of 10-15 points to make about 30-35 points. That is a decent risk to reward scenario, if this pattern plays out.
Watching for relative strength in Apache (APA)
While I am watching the OIH ETF, I am also paying attention to individual stocks within the ETF that may show relative strength. One that has come to my attention is Apache (APA). The fundamental story is strong with this stock, and the technical picture is starting to align itself as well.
This stock also has an Inverted Head and Shoulders showing accumulation, and there is also a Descending Channel to serve as another entry reference point.
Buy #1 would be into the right shoulder in the $95-97 area. This is buying in the dip anticipating stronger action in the future.
Buy #2 would be as it resolves the Descending Channel to the upside above $98-98.50. The stock would be in motion and you would be adding to a winner.
Buy #3 would be a close above the $104-105 neckline. Usually traders are shorting in a downtrend, and a break of that trend can ignite some short covering to get the pattern moving.
At this point you have two good entries so the core average cost would be nice. The Macro Pattern measures a move to $125-130 for 2012, as the distance of the head to the neckline measures approximately 25-30 points.
Since we buy with a tier system, you can sell with tier system as well. If you are in Tier 2 or 3, selling some around $110 would make sense to ring the register and feel good. Then you can hold some for the entire objective of 2012.
Chevron (CVX) also showing positive divergence from OIH
Chevron (CVX) is showing relative strength vs. the OIH, and I believe it can outperform the sector. CVX held the gap from November 30, while OIH filled the gap. The stock also is above all its moving averages, which shows accumulation as well.
I would use a three tier strategy as well here to book some as a trader but hold some as an investor.
Buy#1 or 2 is when it’s working and breaks the series of lower highs. A close above $105-107 puts stock in motion to go back to the highs.
If this group performs into first quarter of 2012, the next spot or resistance to watch would be at $110 area. If the stock holds higher and keeps a series of higher lows, it would be a spot to add for momentum.
Trading back through that area would be healthy for a move to $116-118 in 2012.
*DISCLOSURES: Scott Redler is long OIH
