OIH?

Why a Rally When Oil is Down?

By Bryan Bottarelli
Friday, September 01, 2006 12:32 PM EST
Fri, 1 Sep 2006 17:32:00 GMT

Dear Bottarelli Research Member,

Something fishy is happening with the Oil Services HOLDRs (OIH). For one, oil is down today, which should reflect in the form of selling pressure in today’s trading with the oil service stocks. For two, the OIH yesterday attempted to rally, but that rally got absolutely rejected, putting in a very bearish OIH candlestick formation at the close of yesterday’s action. Nevertheless, the OIH is trading higher. I called upon one of my trader buddies who has access to the OIH pits, and I asked him “why the rise in OIH all of a sudden?”

It was the opinion of this trader that a lot of OIH traders are running the stock up just to get better entry positions on their shorts. He said the recent pattern is to run the OIH up in the morning — and then flip over and enter into short positions in the afternoon. Looking at yesterday’s trading action on the OIH, I have no doubt this is what’s happening.

OIH

I still truly feel that the OIH has more downside coming, but situations like this are why I typically don’t’ like to trade in the later-months of August. When the top floor traders are away from their positions, you can witness games this. Now don’t get me wrong, I have no verifiable evidence of this “run-up and short” practice happening — I’m simply reporting to you what I’ve learned from my behind-the-scenes connections. But if you’ve watched the OIH as closely as I have in the past few days, its’ easy to see this scenario playing out. So here’s what I’d like to do.

For the purposes of the model portfolio, I must adhere to our stop and call the OIH September 135 Puts (OIH UG) closed. But I’ll continue to follow this position for anyone who chooses to maintain the puts for any coming downside action — either this afternoon or later next week.

Above all, don’t let the recent trading action discourage you. The end of August is notorious for slow volumes and depressed volatilities, which works directly against our trading style. But now that we’re in September, I expect things to pick back up.

Also, I’m set to release my newest research report titled Speculative (and Cheap) Doublers, so that’s something to look forward to after the long Labor Day weekend.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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