There was a time where crude oil prices (and energy stocks in general) were the hot topic like bitcoin and Beyond Meat (NASDAQ:BYND) are now. But crude oil now sits 60% below its 2008 highs, so it is far from its glory days. Furthermore, there is a chance that it will never get back to those levels.
But this doesn’t mean that we cannot trade energy stocks. There are always opportunities, especially in the oil stocks like Chevron (NYSE:CVX) and Exxon Mobile (NYSE:XOM). But before we delve into those particulars, we need to evaluate the commodity itself first.
If you listened to the oil and energy experts, you probably got misled several times on the direction of oil prices. The popular opinion is often wrong. Big-name trading houses make high-profile calls about big moves in oil but they often peter out.
This happened in the last two months. When oil was rallying, consensus became that crude was headed back up to $75 per barrel and higher. I shorted oil in April on that headline and won. Then again, after it fell, the meme flipped bearish and the experts called for crude to fall to $45 or lower. So I went long on that warning and again won.
The point of this is not to gloat, but to say that logic works better than any expert opinion when dealing with oil. So ignore their opinions and trade your own thesis.
To that, there are certain things that are fact. If oil is too cheap, then OPEC loses money and they prop prices up. Conversely, if it gets too expensive then they lose market share so they manipulate prices lower.
Their current good balance zone is below $60, but above $52 per barrel, where crude oil is under current conditions. This level here has been pivotal since 2015. So I don’t chase prices when they stray too far from it in either direction.
I know these arguments draw chuckles at in a room full of oil experts, but they haven’t failed me yet. So I will share my opinion on the stocks that depend heavily on the price of oil.
Exxon and Chevron are the two largest oil companies and so these stocks make good vehicles for trading energy prices. They have been the class of the field for decades and this is not going to change anytime soon. They have the know-how and the budget to remain the leaders and the best proxies oil.
XOM and CVX are not always a buy, so you won’t see a pump job here today. Rather, you’ll see a realistic evaluation based on a blend of technical and fundamental observations. The methods of chasing the breakouts or breakdown vary based on personal preference. For example, I prefer using options, especially with relatively slower moving stocks like these. I like to sell puts or spreads to take bullish directional bets and sell call spreads for bearish ones.
Exxon Mobile (XOM)
In the post 2007 financial debacle era, Exxon stock has had a solid floor around $70 per share. This is not a coincidence because it’s the pivot zone for the last 12 years. Fundamentally, XOM stock is reasonably priced at a price-to-earnings ratio of 15 and 1.1X sales. So if oil prices are stable there is no obvious reason to short the stock. So as long as the equity markets are rising, then it owning XOM is relatively safe.
From an investment perspective XOM pays a hefty 4.5% dividend. This is huge since the central banks are stingy, so a guaranteed dividend is a good alternative and a viable, trade-able thesis.
But from a trading perspective, this is not the greatest strategy because of the shorter time frame. So for the purpose of finding tactical ways to trade XOM, traders need to find more surgical entry points on the charts.
Technically, it’s not ideal to keep testing support on a chart. XOM has been doing this for years and since the May 2014 high it has done so from lower highs. But this gives traders a reasonably predictable pattern to time.
The range in XOM is tightening and a move is coming. There are trigger lines just above and below current prices. So not to guess the direction and risk losing money, I’d wait for the breach of either sides to chase in that direction.
For a bullish trade, I chase the breakout above Monday’s highs; $78 per share has been pivotal since April and it marks the start of a potentially bullish pattern. The buyers will chase the breakout for a momentum trade to target $81.50 per share and fill the open gap there. If that happens, there will be resistance between $79 and $80 per share.
For the bearish bet, I would short XOM if the bulls fail to hold $75.50 per share. This should be support and losing it would denote unusual weakness that could offer a chance to press but with tight stops. Why? because XOM is too close to its decade long support zone.
However, there is a small risk of a big correction scenario to $55 per share if that support fails. This is not my forecast and for that to happen the current macro economic conditions will have to drastically change.
Source: swong95765 via Flickr (Modified)
Unlike XOM, Chevron stock is close to its highs. So fundamentally it carries a little richer valuation on Wall Street but only from the price times sales perspective. CVX also pays a slightly lower dividend yield, but still a respectable 4%.
There isn’t a clear entry point for an investment in CVX stock yet given that it’s close to its highs while energy prices are volatile. I’d like to get it closer to $115 per share before considering it from the long side. This is especially true for the traders but it also makes for a better starting point, even for those looking for an investment.
The fundamentals on CVX stock are stable, just like XOM, but there is no urgent need to start long now and suffer loss of capital soon after opening the position. This is where the investors would do good to wear their traders’ hats and wait for a clear breakout before starting a long position.
CVX has been setting slightly lower highs since January of 2018. The current range between that high and the December lows has tightened into a point. So a move is likely coming, but we don’t yet know its direction.
So traders should wait for the clues from the chart. This is where fundamentals need the help of technicals. They provide unbiased opinions to help with the allocation of risk based on actual developments, not conjecture.
If CVX stock closes above $126.20, then it would invite momentum buyers at $127.40 per share. They like to chase trend line breakouts. The idea is to buy high and sell higher. Should that happen, there will be resistance around $132 per share. While this would be a good opportunity for the traders among us, investors who intend on holding the shares a long time can also use the breakout to enjoy a good start to the position.
Conversely, if Chevron stock falls below $123, it could target $120.50 where it’s likely to find footing. Even if that happens, it wouldn’t change the fundamental setup for the stock. This would merely be the 50% retracement of the recent rally from $114 in May.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Unlike CVX or XOM, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) is not a company stock, but rather an exchange-traded fund that mimics owning the major exploration companies like Anadarko Petroleum (NYSE:APC), Diamondback Energy (NASDAQ:FANG) and Pioneer Natural Resources (NYSE:PXD).
The prices for these stocks are definitely sensitive to the movement of the commodities they explore, so the XOP tracks the energy prices pretty tightly.
The intrinsic value of the XOP’s components don’t hold up as well as XOM or CVX when oil prices fall. Case in point, the price of XOP is at least 60% off its all-time highs. And the trend is not stable either, as it has been in a descending channel of lower highs and lower lows for about five years.
I usually don’t like to buy down-trending tickers like this and hope for a turnaround. It is better to wait for the bottom to form. And since they don’t ring bells at the bottom, we look for the right collection of signs.
First, XOP has to form a trough, so it needs to stop making lower lows. It is also important for it to start making higher lows. At this point, it is OK for it to continue to set lower highs as long as the range is tightening.
To this, we can argue that this is happening now since the December low. But so we don’t chase a fake-out breakout, I’d wait for a close above $29 per share first and then above $31.8 per share before I chase. There will be strong resistance near $30.50, as it is a point of interest for the last 10 months.
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