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.