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Tickers in this Article: OIH, FTO, HES, OXY
Oil has been in a decline since reaching the high $80s earlier this year. While it was a little surprising how far oil prices fell during the financial crisis, the rebound also caught traders off guard. Oil had rallied back to $87.50 even against the backdrop of a weak economy. Oil prices backed off those levels later in the summer and are close to testing an important support level near $70. This level has held as support on several occasions and should be closely watched.

Source: StockCharts.com


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Other oil stocks have been showing similar declining patterns. The Oil Services HOLDRs (NYSE:OIH) ETF, which tracks several oil-related stocks, is leading the way lower, and topped out ahead of oil earlier this spring. OIH fell out of a base in May, completing a top and fell sharply toward the $90 level. It has since been consolidating in a rising wedge pattern, which often plays out as a continuation pattern. OIH just began to break down from this pattern and all eyes should be on the $90 level again. (For more, see Analyzing Chart Patterns: The Wedge.)

Source: StockCharts.com


Frontier Oil Corporation (NYSE:FTO) is an individual oil stock that recently fell under an important level. FTO had been building a base between $12.15 and $15.50 for virtually all of 2010. It recently started to move down toward this level and failed at attracting buyers a few days ago. The result was a breakdown, and unless FTO can quickly climb back into its base, it could be headed for a retest of its bear market lows.

Source: StockCharts.com


Hess Corporation (NYSE:HES) is another individual stock displaying a similar pattern of weakness. HES broke down through an important level near $57 in May, and has been attempting to stabilize since then. Each attempt at climbing back above this level has been rebuffed and HES is now trying to stabilize near the bottom of its recent trading range. The $50 level has been holding as support, and should be monitored moving forward.

Source: StockCharts.com


Following this theme, Occidental Petroleum Corporation (NYSE:OXY) also broke through an important support level and is below its base. The $75 level had held on a few occasions, and this level may become stiff resistance moving forward.

Source: StockCharts.com


Bottom Line
Much of what happens to oil stocks will depend on the price of oil moving forward, but traders should contemplate the fact that they are showing bearish patterns over the past several weeks. Many of these stocks are oversold and likely due for a bounce, but traders should keep an eye on them to see how they react. Even if oil can bottom out at these levels, these stocks would need much more time to stabilize. If oil continues to weaken over the next few weeks, these stocks could be in for a rough autumn.

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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