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Given the spill in the Gulf of Mexico, it's certainly no surprise that the Philadelphia Oil Service Index (OSX) is down 25% from its recent highs. Given the declines, is the bad news already priced in? According to one popular formation in technical analysis, the answer is no. As shown in the chart, the OSX index is on the verge of completing an 'iron cross' pattern. An iron cross occurs when a stock or index's short term moving average (50-DMA) falls below the longer term moving average (200-DMA) while both are decreasing. According to people who follow technical analysis, an iron cross is typically a prelude to further losses.
So how good a sell signal has an iron cross been on a historical basis. Since 1997, the OSX has had four other iron cross formations. Looking at the index's historical performance following these four periods shows that the OSX has averaged declines over the next week, month, three months, and six months. While the range of returns varied widely over the three and six month periods, the index has seen declines in the one month period after each prior occurrence.
On the flip-side, we also looked at the performance of the OSX following a 'golden cross', which is the bullish antithesis of an iron cross. In a golden cross, an index's short term moving average crosses above its longer term moving average while both are rising. Since 1997, the OSX has seen five golden crosses, and while the index has averaged gains following these occurrences, like we saw with iron crosses, the range of returns has varied widely.
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