Chevron (CVX) has benefited quite a bit over the last eight weeks as the cost of oil has risen by 25% since the end of June. I am seeing signs, however, that the price of oil is about to level off (without a catastrophic event influencing its price). I know there is a lot of talk about quantitative easing talking place soon, but I am not sure that it will not take place or that it will cause oil to rise like it had in the past. In turn, I expect the stock to level off and possibly reverse direction for a season. This provides the opportunity for a short-term income play.
Oil Is Priced High Already
The price of oil is so high now that it's possible all speculation by the Fed about renewed bond purchasing could do nothing but keep prices where they are. In a research note, Commerzbank said the following about oil prices:
The high oil price is thus coming under fire both from the U.S., the largest consumer of oil, and from Saudi Arabia, and the biggest exporter, which is likely to preclude any increase in prices.
Even Saudi Oil Minister Ali al-Naimi mentioned concerns about the 25% rise in oil prices since late June. Labor Day has passed, which marks the end of the summer driving peak and usually leads to lower oil prices. That said, it is highly probable the dollar could continue to lose some ground with a full-fledged QE3 package in place -- but I do not believe this will be the case. With QE1 and QE2, the economy was much worse off than it is now. So if something does take place, I do not believe we will see a full-fledged QE3 like we have in the past and thus the drop in the dollar will not take place like it has and oil will not rise.
So Chevron will see a topping out in price and, I believe, a reversal very soon. Take a look at its chart:
Click to enlarge image.
Chevron has had a good climb, but it may be at the end of its move up. My reasoning behind this observation is what I am seeing in the two indicators I like using. I see a negative divergence in the MACD and the MACD Histogram. When I see this alone, it usually indicates a slowdown and a consolidating period, but not necessarily a direction change. But now I am seeing a negative divergence in the RSI as well, which has been developing for the last two weeks. This is supportive of what we are seeing in the MACD. So I am of the opinion that the oil company may have reached a high for the present time, and we are likely to see a pullback in oil now.
The Option Play
- Buy the December 2012 put with a strike of "115" (priced at $4.80)
- Sell the December 2012 put with a strike of "110" (priced at $2.88)
- Net Debit to Start: $1.92
- Maximum Profit: $3.08
- Maximum Risk: net debit
- Maximum Length of Play: four months
Reasoning Behind the Trade
- I see a reversal pattern coming in the charts with strong support.
- Oil Prices are high right now.
- I am not convinced that a full-fledged QE3 will take place.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.