Category Archives: downside

On January 6, 2015, we said the following about the NYSE Oil and Gas Stock Index (XOI):

“The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated.  However, we did not include the extreme downside target of 575.41.  We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.

“Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08.  Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level. ”

At the time, the NYSE Oil and Gas Stock Index was trading at 1,287.66.  The September 4, 2015, XOI close was 1,085.81, down –15.67%.  At least from the perspective of the last posting, the SRL achieved the expected downside target.

However, lurking in the background is the extreme downside target of 575.41.  Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point.

For now, we’ll resign ourselves to the idea that the 812.08 is the next downside target.  If that target is achieved we believe that the 575.41 level is highly achievable.  Given our concern for the downside risk, oil sector stocks should be bought in three stages at 958, 812 & 575.

In the period from 2002 to 2009, the NYSE Oil and Gas Stock Index (XOI) presents us with a possible template for what to expect in the current decline in the same index.  Below is Gould’s Speed Resistance Lines (SRL) for 2002 to 2009 of the XOI Index.

The above chart shows the conservative downside target of 1,326.48 and the extreme downside target of 543.36.  The mid-point of the downside targets is 934.92.  In the case of the XOI index, it managed to achieved the conservative and mid range for the index.  However, the extreme downside target was not achieved.  The full extent of the decline is indicated in red at the 761.30 level.

Our guess is that the XOI index will accomplish a similar pattern of “performance” on the downside in the current run as was the case in the 2002 to 2009 period.  We’ve charted the progress of the XOI Index in the period from 2008 to the present with Gould’s SRL.

The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated.  However, we did not include the extreme downside target of 575.41.  We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low. 

Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08.  Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level.  Two funds that trade in line with the XOI index are PowerShares DB Oil ETF (DBO) and Direxion Daily Energy Bull 3x (ERX).  One ETF that trades the opposite of the XOI index is the Direxion Daily Energy Bear 3x (ERY).