While the general markets remain in pretty good shape even after some recent distribution, the commodities complex has suffered far more damage. Much of the focus has been on silver prices, but oil prices have been hit hard as well. The United States Oil Fund (NYSE:USO) ETF, which can be used as a trading vehicle for oil, is showing the recent plunge quite clearly. USO cleared a significant level in February as it broke above $39. After some initial volatility, USO rallied sharply along with crude oil. It was trading near $45 as crude oil prices cleared $110 a barrel. However, USO reversed and gave up the entire post breakout gain in the span of three days. This is not healthy behavior or consolidation, and warns of further volatility. If USO falls back under the $39 level, it could be signaling further downside.

Tutorial: Intro To Technical Analysis

The Merril Lynch & Co., Inc. Oil Service HOLDRs (Amex:OIH) ETF, which tracks some oil service stocks, is in a leading divergence to Crude. OIH was consolidating a prior rally for most of 2011 as it traded between $150 and $165. OIH started showing weakness late in April as it dropped under its 50-day moving average. It then failed to hold above the $150 level and volume picked up as it broke down. This breakdown could be a full-fledged head and shoulders topping pattern which would be signaling a rough summer for this group.

Halliburton Company (NYSE:HAL) is a key oil service stock and it is showing some weakness, although not to the degree of OIH. HAL cleared an important level in late January as it broke above the $42 level. It has gradually been rising towards the $50 level as it continues to dip under its 50-day moving average. Each dip has attracted buyers and this has been a reliable entry point. However, HAL started to repeat this pattern a few days ago and then fell back under its 50-day moving average again. It has also fallen under a trendline, marking the bottom of the recent wedge it has been trading in. The $46 level should be watch closely in the coming days as a drop below this level could signal a drop towards the $42 level.

Dril-Quip, Inc. (NYSE:DRQ) is another oil service stock showing some weakness. In fact, DRQ has already broken down under its base and could be in trouble. DRQ had been holding the $72 level on several occasions, and sliced right through it in early May, along with its 200-day moving average near $70. Volume also ticked higher on this drop and DRQ is now attempting to bounce back towards its base. The $72 level could act as significant resistance, and traders need to watch this level for a reversal.

It's difficult to bet on a scenario that includes a strengthening dollar and weakening commodities for any length of time, but crude oil and oil services sectors appear to be at the early stages of a correction. Traders need to keep an eye on crude prices first and foremost, but also keep in mind that service stocks can show weakness despite strength in the commodity. OIH and also the Energy Select Sector SPDR (NYSE:XLE) ETF are two trading vehicles to watch for a trend move in the sector. A breakdown in these ETFs will signal a rough summer for oil stocks. (For more, see Oil And Gas Industry Primer)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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.

Related Articles
  1. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  2. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  3. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  4. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  5. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  6. Chart Advisor

    2 Short-Term and 2 Longer-Term Trade Ideas

    Two shorter-term and two longer-term trade ideas to consider, based on trends and the possibility of a breakout.
  7. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  8. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  9. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  10. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center