Everyone has noticed that the prices at the gas pumps have been dropping and perhaps relief is on its way. In an unexpected, pleasant surprise for consumers, oil is now at 5-month lows. In Vienna, OPEC announced that they were concerned about dropping prices, but will not cut their production at this point.

Today, we will discuss the fate of oil stock prices, recent events, technical breakthroughs, and the perceived impact on equity market. Let's get to the oil chart first.

As you can see, just last week, the OIX (CBOE Oil Index) dropped below a major point of support (the 100-day line) and there's been no bounce up since then. This morning has brought no support either and at this point (10:30AM) the OIX is down 2.46%. Momentum is down significantly as you can see by the 10-period line on the chart. One of the key similarities between this drop and the last one during the late Spring is the speed at which the drop is occurring and the stock market weakness that is accompanying the decline in the markets. We believe the bearish case for oil is much greater than the bullish case. As far as the effect on equity markets goes, there have been several instances such as March 2005- May 2005, October 2005, and May 2006- Mid June 2006, where strong corrections in the OIX have come right before strong upward moves in the SPX. This suggests that as this oil correction eventually ends, we may see an upswing in equity markets.

Let's now move on to 2 major stocks in the oil sector. First, lets look at Chevron (CVX)

As you can see, the stock has been in a tight range for a couple of months now. You can clearly see that CVX has dropped below the range in a bullish fashion and a put play would be better advised than a call play. Next, take a look at the chart of Exxon Mobile (XOM).

Like CVX, XOM is in an oversold state, but there seems to be no emergence from that oversold state and momentum is moving down strongly. In conclusion, oil prices are moving down strongly and in the short-term, this seems more likely to continue than to stop. Also, sentiment seems to be somewhat bullish on oil regardless of dropping prices.

Price Headley is the founder and chief analyst of BigTrends.com.