On the charts, one indicator I follow is now as oversold as I’ve ever seen it. Combined with zealous bearishness in the financial press, it does seem that the market has gone too far south to sustain.
To be sure, I came to the same conclusion last month based on the usual suspects of momentum, support and anecdotal sentiment. I wrote here that crude oil had reached a major support zone in the $75-$79 area, and several energy stocks sported bullish price patterns (see Getting Technical, Energy Stocks Worth Buying: Diamond, Nabors, Nov. 10).
But to be fair, I said that the stocks that looked good had to break through short-term resistance levels in order to be buyable. They never did, so please give me that.
Getting back to the market, the hugely oversold indicator is the relative strength index. While this measure of market speed and power often gets overbought and oversold in short-term time frames, its long-term, weekly counterpart has only been oversold – dropping below 25 on a scale of 0-100 – three times since futures started to trade on the New York Mercantile Exchange in 1983 (see Chart 1).

Chart 1

Light Crude Oil Futures

Because it uses a longer time parameter in its calculation (a week) it is much less common to see it fluctuate wildly. Indeed, the last time it registered an oversold reading was in 2008 when oil dropped from $146 per barrel, in round numbers, to $33 in the space of seven months. Weekly RSI is more oversold now.
The background conditions during all three oversold periods in the past three decades seem to be similar.
Without dwelling on them, in 1984, 2008, and today the headlines reported gluts in world oil supply and weak global economic outlooks. On the charts, we can see that prior price slides lasted roughly 20 weeks.
The current slide is already at week 24. History suggests the panic – my description – is near its end.
From a more objective sentiment angle, Jake Bernstein’s Daily Sentiment Index (DSI), a survey of futures traders’ views on market direction, registered three out of 100 on Friday. Just about everyone surveyed was bearish, an extreme reading that should make contrarians take notice. Bernstein, a veteran trader and proprietor of JakeBernstein.com, said that the DSI has been a good leading indicator for oil over the years.
The first energy sector to be written off at this time is shale oil production. While truly oversold, the charts of even the more highly capitalized names, such as Oasis Petroleum , still have that falling knife look. So do drillers, such as Transocean mentioned in this column last month.
While a large swath of stocks from many energy subsectors were still reeling Monday, some of the most highly capitalized names such as Exxon Mobil and Chevronare responding to the short-term gain in oil itself. I want to emphasize that a 3 percent or so gain in oil after a 40% slide this year is nothing much, but the point is that the major integrated stocks are at least following along. Not every type of energy stock, especially shale, can say the same.
Is Exxon a buy? Technically, since it is below its 200-day average and not showing the extreme negativity seen in the commodity, it is not (see Chart 2). But it is not a sell, either, because it is not at new lows and it seems to be responding positively at major support going back several years.

Chart 2

Exxon Mobil

I cannot say it will not succumb to the bears if oil continues to plunge, but unless oil is going away as an energy source this seems to be a good risk for investors with long-term time horizons. It pays a nice 3% dividend yield while you wait.
We’ve seen oil gluts and bear markets before and each time, it seemed that “everyone” decided it was game over for oil prices. Although oil can move lower from here, selected oil stocks seem to be more stable and nibble-worthy.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.