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I've given up trying to understand

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Sometimes the market can be so humbling. Today I sit with a smile on my face as I look at the Oil Service Index (OSX.X) pound out a 3.2% gain. It doesn't make sense that this sector would gain as OPEC has been cutting production; energy futures are stuck near the lower end of 12-month lows. The only thing that makes sense is that the sector reached a level of retracement support and now looks set to rally to retracement resistance.

It was years ago that began "believing" in technical analysis. Yes, in the end there does seem to be some fundamental reason for why things happened, but by the time most of us get the information, the move is over and the bulk of the profits/losses have been realized.

Does today's rise in the Oil Service Index (OSX.X) mean anything? Yes, I think it does. I think it means that the MARKET still believes that the economy stands a chance of growing, consuming energy, and eventually stimulating demand that will have OPEC raising production quotas to feed the demand and thereby stimulating business for many "service" related company's in the sector.

Oil Service Index Chart - Daily Interval

I feel the various sectors we follow on a daily basis all give us some type of "message of the market" or insight into what the market is thinking and doing with its money. As it relates to a scenario of a growing economy, then the Oil Service Index (OSX.X) does play a role.

It's a process that requires a "chain of thinking." It's rather simplistic, but is built off of supply and demand. If the economy grows, then that stimulates demand for energy. As demand for energy grows, then the demand for energy services grows. As demand gross across these levels, then revenues at companies that serve the energy industry grows. Those companies that are most efficiently and well-managed will have a greater portion of revenue eventually flowing to the bottom line.

I'm a big believer that the "market is all knowing." You can't hide buying (demand) and you can't hide selling (supply). I do believe in "smart money" that knows things before most. There isn't any one person that is "smart money." Instead, there is "smart money" in the oil industry, there's smart money in the networking industry, there's smart money in the precious metals industry.

Regardless of who or what is "smart money" I've found that "smart money" in a sector/industry won't aggressively buy/sell stocks if they don't see some type of catalyst for movement.

Right now, one could look at the Oil Service Index (OSX.X) and say it is range bound from $75 to $90. The economic bull is at least finding the recent bounce from the $75 levels as being confirmation of sorts that the MARKET, or some part of the market still has some conviction of a recovering economy and demand for stocks in the sector outstripped willing sellers at the $75 level. Is there enough conviction from the demand side to overcome supply at the $90 level. Will "smart money" have more information now, or in the future, to have it getting more aggressive on the buy side of things at $90, $95 or $99?

We never know for sure until it happens, but for now, the economic bull scenario is still alive as it relates to the Oil Service Index (OSX.X). It's not euphoric by any means, but the recent bounce from retracement support keeps the scenario alive.

Jeff Bailey
Senior Market Technician
Option Investor

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