Oil Service stocks have been quietly showing relative strength, and the recent buyout of Petrohawk Energy Corporation Co (NYSE:HK) may be giving this group a shot in the arm. Often when there is a buyout, it will fuel more speculation in its sector as investors try to position themselves for another possible acquisition. It's interesting that this group has been performing well, despite the fact that Oil has basically gone nowhere after a sharp pullback in May. If crude gains any strength, it would be another possible catalyst for this group.

TUTORIAL: Commodity Investing 101

The Service stocks as a whole are also showing an interesting pattern. The group as represented by the Merrill Lynch & Co., Inc. Oil Service HOLDRs (AMEX:OIH) ETF is rebounding after what appeared to be a breakdown in June. OIH had fallen under a consolidation in May on increased volume and after a failure to bounce near $155, headed even lower. However, it bounced sharply after the false breakdown, and appears to be completing a reverse Head and Shoulder's pattern. The neckline is the prior resistance area near $155 which is starting to get breached. If OIH can hold above this level, it would likely trap a group of bears and act as a floor for the near future. (For more, see How To Trade the Head And Shoulders Pattern.)

One stock in this sector that has been showing good strength is Carrizo Oil & Gas, Inc. (NasdaqGS:CRZO). CRZO had been working on a base all year before finally clearing it in June. There are no signs of the market correction in this stock as it continued to set higher lows over the past several months. It is now pulling back for a retest of the breakout area and appears to have attracted buyers at this level. Traders should watch to see if CRZO can hold above its prior base.

Stone Energy Corporation Common
(NYSE:SGY) is another stock in the Oil Service sector that is worth monitoring. While it hasn't cleared its base, it has cleared some resistance levels and appears to be headed for at least a retest of its 52-week highs near $36. It held critical support near $28 on several occasions without breaking and this would be the key level for traders to focus on as a line in the sand. (For related reading, see Mastering Short-Term Trading.)

A smaller stock in this group that could be headed higher is Callon Petroleum Company Common (NYSE:CPE). CPE had been correcting in a wedge since surging to a high just above $9 in February. It shed about 30% of its price in a few months before, finally turning sideways later in the summer. It recently cleared the wedge it had been bound to, and after trading in a tight range above the breakout point and its 50-day moving average, CPE could be ready to resume the prior trend.

While I am leery of the Oil stocks having a sustained rally with Crude Oil being stagnant, we are also headed into the heart of hurricane season and the summer driving season. If Oil gets a spike, it could spark more interest in this group. With many of these stocks already acting well, it could lead to some great trading opportunities. (For more on crude, see Contango Vs. Normal Backwardation.)

Charts courtesy of stockcharts.com.

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

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