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How to Trade Big-Name Oil Stocks - 48508 views
BALTIMORE (Stockpickr) -- With most markets looking wishy-washy to start the week, it’s time to take a technical look at what’s going on with the biggest name stocks on Wall Street.
In case you’re not familiar with technical analysis, technical charts are used every day by proprietary trading floors, the Street's biggest financial firms and individual investors to get an edge on the market. And according to some sources, skilled technical traders can bank gains as much as 90% of the time.
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Every week, we take an in-depth look at large-cap stocks that are telling important technical stories. This week, the focus is on oil.
There’s been plenty of attention on oil stocks in the last couple of months as inflation fears and tumult in the Middle East. First, as oil prices rallied hard in the month of April, investors were clamoring to get onboard with oil trades. Now, with crude prices down considerably this morning, investors are wondering if this industry has played out. We’ll attempt to answer those questions today.
Now, on to this week’s stocks.
First up this week is Chevron (CVX), the $210 billion supermajor that rings in as the second-largest oil company in the U.S. Overall, Chevron’s trajectory has been upward in 2011, giving rise to a 14% gain in shares year-to-date. But that upward movement could be at risk given the stock’s proximity to trend line support right now.
Basically, shares of Chevron are trading right at their trend line support level -- a level that acts as a sort of price floor for share movement. But that price level is under threat given oil’s massive downward pressures today; Chevron’s showing expected weakness this morning
So how do you trade Chevron right now? If shares can stabilize by this afternoon’s close and manage to hold within a modicum of their trend line support level, traders should wait for a bounce higher before going long. That said, the likelier scenario right now looks like a downside bet on a sustained fall below that support level.
ProShares Ultra Crude
A similar situation is taking place in shares of the ProShares Ultra DJ-AIG Crude Oil ETF (UCO), an exchange-traded fund that offers leveraged exposure to crude oil. Like Chevron, UCO is holding above trend line support but likely not for long. Because this fund tracks twice the performance of crude oil on a daily basis, it also tracks twice the losses when oil futures take a hit.
Things had been looking strong for UCO in the past. As crude prices rose, the uptrend that the ETF was seeing accelerated, a typically good sign, but one that’s rarely sustainable in the long-term.
Since then, a negative divergence in momentum has signaled weakness in shares. That’s not to say that this ETF won’t become a good way to get leveraged exposure to oil in the future, only that now isn’t looking like a low-risk entry point for shares.
Wait until oil prices find some semblance of support before going long any oil play right now.
National Oilwell Varco
Of course, traders looking to make a directional bet on oil don’t have to sit on their hands. That’s because shares of oil and gas servicer National Oilwell Varco (NOV) have already broken below their trendline support level. Now, a reasonable price target for shares looks like the 200-day moving average down at 60.63.
As with UCO, National Oilwell Varco has had a negative divergence in momentum during the stock’s last two attempts at making new highs -- that’s a very big red flag for investors.
Likewise, volume is confirming that bears have control of this stock right now. If you’re worried that it’s too late to go short this stock, don’t be. I’d suggest a protective stop right at NOV’s now-overhead trend line.
Switching gears from oil stocks, let’s take a look at some other trades that could be worth watching right now. One interesting opportunity comes from Banco Santander (STD), a major European financial group that has large exposure to banking in the attractive Latin American market.
In the past few months, the financial sector has been a major laggard -- but in the case of Santander, a test of resistance suggests that shares could be making a move above $12.50.
As usual, it’ll be important to wait for a break above the $12.50 level before going long. With support at the 50- and 200-day moving averages, this stock could continue to consolidate within its trading range before buyers make an attempt to bid shares higher.
Remember, because Santander is an ADR (a foreign stock that’s dual-listed on an American exchange), it’s prone to gappy trading. Those gaps, called suppression gaps, are the result of off-hours trading overseas. They aren’t a factor in the stock’s technical outlook.
MGM Resorts International
Last up this week is MGM Resorts International (MGM), a $7 billion casino resort operator that ranked among the most heavily traded stocks yesterday following the firm's first-quarter earnings release.
Previously, shares of MGM had found strong support at the 200-day moving average and resistance right at $14 -- but the stock’s recent move above that resistance level suggests that higher share prices could be in store.
I’d recommend waiting for confirmation today that MGM is able to hold above $14 and then consider a protective stop just below that resistance level.
One big bet on MGM comes from John Paulson's Paulson & Co., which maintained a 43.8 million-share position in the most recently reported quarter.
To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.