Exxon Mobil Stock Is Under Pressure — Is It Ready to Rally?
Last October, investors decided that the price of crude oil was too cheap, so they bought it up to $75 per barrel. This was a an impressive 150% rally from the lows of January 2016. As usual, the rhetoric quickly flipped uber bullish and the pendulum swung too far in that direction, buoying names like Exxon Mobil (NYSE:XOM).
The oil bulls immediately called for even higher prices. I went on record that that the fair price should be closer to $55 per share and that rhetoric alone was responsible for the sharp rise not the increase in demand.
The leaders who are in charge of oil do manipulate prices. Recently OPEC averred that they are pumping as much as they could and prices fell apart as they did. Investors panicked out of the oil trade, bringing it back down to below $60 per share. This also caused a 10% drop in quality names like Exxon Mobil stock.
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So the question now — is this the bottom in crude oil price? I know we are closer to a bottom but not necessarily at it. Around $50 per barrel would be the 50% retracement from the lows of October of 2016, so there still is room to fall depending on rhetoric.
Unlike the price of oil, energy stocks like XOM have not been as wild. They traded in a consistent horizontal range over the past five years. Exxon Mobil stock is down 3% in a year and most of it came in the past month.
Fundamentally, the company is not cheap. It sells at a 19 price-to-earnings ratio. While this is in line with its competition say Chevron (NYSE:CVX), it’s too expensive relative to the alternative investments. For example this is priced the same as Apple (NASDAQ:AAPL). I am not comparing the two from a business standpoint, but rather from a money-opportunity perspective. One has the prospect of growth while the other one is an energy company.
Last February, XOM stock fell off a cliff with the rest of the stock Market. Luckily the bulls were able to rally back almost all the way by October only to fall off the same cliff again back down to $76 per share.
Time to Get Into XOM Stock?
So at this point, is it time to buy XOM stock for another $10 bounce? Therein lies an opportunity indeed, but…
As tempting as that is, there are problems looming. We have global leaders threatening to derail this expansion period with tariff wars mainly between China and the United States. Central banks are also at the tail end of their quantitative easing programs. The United States Fed Reserve is already in a hurried tightening cycle.
So these uncertainties have caused the stock market to have an official correction and teeter on the brink of a recession. We are now far from the highs and bouncing along a floor board. If it breaks, it would open another trapdoor lower for XOM stock.
Exxon has a similar line at $76 per share for its own chart. If the bears are able to break it, then $72 per share can come fast. This is not a forecast but a realistic scenario that could unfold in days.
So instead of jumping in long now to grab a handful of stock, I would rather wait for the next two weeks to at least see the outcome of the G20 meeting. If my portfolio is out of balance and in need of a new position then I could nibble with a partial position to relieve the itch of investment. But going full position immediately right here is making a statement where the argument is weak.
Technically, it is encouraging to see $76 hold a support several times. But every bounce off of it creates a chip in its foundation, especially when the stock is not forming a descending wedge. XOM stock has the shape of a loosely interpreted head and shoulders pattern.
So without clarity on the prices of oil and where OPEC and the United States plan to take prices, and as long as 25% tariffs remain on the January schedule, going long any stock here is an iffy proposition. Let alone going long Exxon Mobil which is holding on by a thread to a ginger floor of $76. This is fraught with danger.
At this point I would rather sell puts below $70 to create income and have the opportunity to own the shares at $70 rather than by the stock and hope it rallies in order to make money. But that’s the topic for another article.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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