More Trouble for Oil Services ETFs?

Zacks

The recent crash in the precious metal space has rocked commodity investors. Metals like gold and silver have faced the wrath of the vicious sell-off in the commodity space earlier in the week, losing double digits in many cases (read Brutal Trading Continues in Gold Mining ETFs).

Unfortunately, along with precious metals, other commodities as well as commodity producers have seen a vicious plunge in prices as well. This has created a huge dent in what was until recently ever increasing positive sentiment.

Speaking of energy commodities, these have had a good start to the year, particularly after a forgetful year in 2012. In fact the energy commodities for long have been plagued by falling prices on account of oversupply as well as reduced industrial demand.

It was also reflected in the top and bottom lines of energy companies as the energy sector proved to be one of the laggards for the S&P 500. However, after a good start to the year, it seems that the energy commodities, especially oil – is most likely to continue its weak trend from the previous fiscal year (see Two Niche ETFs Beating SPY).

Nevertheless, a closer look at the chart of Market Vectors Oil Services ETF (OIH) reveals that oil services companies might be in for a tough time ahead. OIH tracks the performance of 26 oil services stocks and thus provides great exposure to the broad segment.

The chart above represents a one year daily price chart of OIH. As we can see, after a brief surge upwards initially in 2013, the ETF found a top around the middle of February. Since then the trading action has been pretty choppy, to say the least (read Gold ETFs in Focus: When to Consider GLDI).

Although the ETF still continues to be in a long term uptrend as indicated by the upward rising support line, the short term picture is pretty bleak. Since reaching the top, the near term weakness has well and truly crept into the ETF and is seen to make lower highs and lows.

Furthermore, the recent downward momentum is most likely to take the ETF further down. In fact the long and short term trend has caused a triangle formation in the ETF which it has very recently broken to the downside.

And the downward momentum on this occasion seems to be pretty strong as the ETF has seen significantly higher trading volumes (encircled portion in the volumes chart) while the breakout occurred (see Small Cap Japan ETFs: Overlooked Winners?).

Downward pressure in oil prices coupled with a strong U.S. dollar will surely take a toll on the ETF. Still, after the recent volatile trading sessions, it is unlikely that the ETF will plunge very soon.

Instead a more realistic course of action would be a brief consolidation at current levels since the ETF seems to be quite oversold. Though we think that the fund could plunge further after this consolidation period. The same is concurred by the RSI and Williams R data which show an oversold reading.

Bottom Line

As is quite evident, the ETF is extremely correlated with prices of oil, therefore any weakness in the energy commodity is likely to show up in the ETF as well. This is particularly important considering the fact that oil prices have also been facing downward pressure for quite a long time.

Also, the investment case for oil remains rather bleak in the near term. This explains that the weakness in the ETF is here to stay for some more time.

Furthermore, OIH has a Zacks ETF Rank of 3 or ‘Hold’; therefore we are not looking for great things from the ETF in the near term either. The ETF has a ‘High’ risk outlook as well, so investors should probably avoid this volatile and uncertain oil fund for the time being.

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