The Oil Service HOLDRS Trust (NYSE: OIH) is still range bound, suggesting uncertainty about the balance between supplies and the economy.



Chart Courtesy of StockCharts.com



It used to be that supply was the prime mover in the oil markets. Lately, though, it's been about demand, as the global economy has cooled.

China's demand has been steady to rising, compared to the U.S. demand that has been lagging. But if you put that into context, China's economy is essentially the size of California's, which is signifcant, but still less than the U.S.

More interesting is the notion that Brazil, a rising economy on its own right, is not as dependent on gasoline as the U.S. or China. Brazil's cars are 50% dependent on ethanol, and that trend is not likely to change.

Which brings us back to OIH's chart message. The ETF has been trading between 110 and 135 since October, and closed at 122, just about in the middle of the range on 2-1. It's below its 20 and 50 day moving averages, which means that it's trying to make a decision about what's next.

We think that OIH may hold a key to what's next, both for the markets and the economy. If this ETF starts to show strength, it would suggest that smart money is nibbling at the energy sector, in expectations of a continuation of the recovery.

And that means that Friday's employment report, if it's an up side suprise, could be what triggers more strength in energy.

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