The price of oil has been rising over the past seven or so trading days on the back of new tensions with Syria, among other things. As a result, shares of energy stocks such as that of Phillips 66 (NYSE:PSX) have been on the rise. Although PSX stock looks constructive through the longer-term lens, in the near term it is increasingly overbought and at risk of stalling or mean-reverting lower.
Not every sector of stocks in the S&P 500 has a single clear “thing” that makes it move the way the energy sector does. For the energy sector — all else being equal — it is simple; oil makes a good move up or down and oil stocks tend to follow. Of course, not all energy and oil stocks will move in sync but there is an undeniably strong positive correlation.
Phillips 66 Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To put some pictures around this, let’s first start with the multiyear weekly chart. Here we see that PSX stock for the most part from the second half 2015 until October 2017 traded in a well-defined range as marked by the two blue bars.
By October 2017 the stock began to break out, not surprisingly at least in part due to an equally notable rally in the price of oil. The stock then went into parabolic rally mode in December and into late January 2018, where it simply could no longer keep the momentum going and stopped dead in its tracks.
The stock then dropped a sharp 15% in just a few weeks before finding support at the upper blue box on the chart. This classically bullish move through the lens of technical analysis is a simple re-test of a prior breakout point, which is to say that former resistance then became support.
The latest rally over the past number of weeks has been constructive and has gotten the stock right back to its late January highs.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
While all of this looks and sounds constructive on the bigger picture chart above, my concerns on the upside of this stock lie around the more near-term time frames.
On the daily chart, we see that the rally over the past few weeks now has PSX very overbought from a momentum perspective as per the MACD momentum oscillator at the bottom of the chart.
Phillips 66 is scheduled to report its next batch of earnings in about a week and a half on April 27, and for my part, this is not a stock I want to be long into earnings.
Should the stock rally after earnings (from around the current levels) it could offer an opportunity to fade/short the move for a trade. Alternatively, should the stock drop after earnings, one could look to buy the next bullish reversal.
There are various strategies to take advantage of this current setup in PSX stock and generate trading income. Today I will discuss my favorite such strategy in a special webinar for InvestorPlace readers; Using Implied Volatility for Steady Income. Register here.
For now though, my number one message on this stock is not to chase it higher at current levels from a swing trading perspective. And indeed profit taking would be a wise choice if one caught parts of the most recent multiweek rally.
Check out Anthony Mirhaydari’s Daily Market Outlook for April 17.
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