Tickers in this Article: USO, XLE, XOM, COP
The U.S. dollar is trading near its all-time lows again and yet oil is also showing weakness. This is interesting, as the two typically share an inverse relationship. It's important to take notice when markets decouple as they may be warning of some other force driving the markets. In this case, it's easy to see that there are concerns with both a deteriorating economy and the U.S. debt-rating circus. Regardless of the actual cause though, the simple fact is oil is showing weakness at a time when it should be getting help from the dollar. The commodity as represented by the United States Oil Fund (NYSE:USO) had been gradually deteriorating over the past few months as it built the right side of a head and shoulders base. The pattern was completed when it sliced through the $35 level confirming a top in the commodity. USO is now bouncing back towards the bottom the prior base which should now act as resistance. Traders should keep an eye on how USO acts near this level, as a reversal here could cement a top being in place.

The oil service stocks aren't faring any better either. The group as represented by the SPDR Select Sector Fund - Energy (NYSE:XLE) ETF, is also revealing a breakdown from a base. This was a slight surprise, as XLE showed strength in rallying from near $70 to $80 just a month ago. However, XLE fell apart with the recent market weakness and shed over 20% in a few weeks. It has now bounced back quite sharply, but remains under the prior base. It still has some room before reaching both the bottom of the base and its 200-day moving average, but sellers could begin appearing ahead of these levels.

Exxon Mobil Corporation (NYSE:XOM) is the obvious giant in this group and it is trading in much the same pattern. There were clues leading to the breakdown despite the rally attempt in July. Notice how the 50-day moving average was already sloping lower in May through June showing a trend shift. When XOM reversed at a lower high near $85 in July, it set the stage for a new low. While it may have been surprising to see it occur so quickly, the chart was pointing in that direction.

There are no surprises on the chart for ConocoPhillips (NYSE:COP) either. It did have a large gap in July that completely reversed and left many bulls trapped. This is often the fuel that sustains a move lower, as trapped buyers are forced to sell. COP dropped 20% from top to bottom and is now in the process of the initial oversold bounce. Even if COP set an important low on the plunge, it will take time and likely a retest of the lows before COP is safe again.

The Bottom Line
The oil stocks have been absolutely crushed over the past few weeks. Oil has fared no better despite a falling dollar lending validity to the move. While they have all bounced in the past few sessions, they are rapidly approaching levels that may bring in sellers. Often, areas that were acting as support will transition into resistance areas, as traders attempt to breakeven on their failed trades. This is one reason why bottoms usually take a while to develop. It takes time for trapped buyers to exit the stock, and for those shares to be eventually exchanged to those accumulating the stock. It may take a retest of the lows or even lower prices before this process works itself out. In the meantime, traders should be very cautious as it appears these stocks (and commodity) are headed back lower.

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.

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