The sharp reversal in crude oil prices Monday caught regulators' and the market's attention. MoneyShow's Tom Aspray looks at the technical evidence to assess where prices are going, and shares one out of favor oil service company that appears to be bottoming.
The three-minute, $3.60 plunge in Brent crude oil prices on Monday is still being analyzed by the CFTC as well as exchange officials. Don't expect a clear answer, as the most likely cause was thin pre-holiday trading that was exacerbated by option activity.
Investors in oil stocks are obviously concerned, as the S&P Energy index is up 22% from the June lows, which compares favorably to the 15.3% gain in the Spyder Trust (SPY). The SPDR S&P Oil & Gas Exploration ETF (XOP) is up 29.5% during the same period, and many individual oil stocks have done even better.
There were technical signs in July that crude oil had bottomed, and weekly analysis indicates that the intermediate trend is still positive. The daily studies are also positive, but the very-short-term outlook is neutral.
There is one beaten-down oil equipment and services stock that could complete its bottom once the current crude oil correction is over.
Chart Analysis: The weekly chart of crude oil prices shows that the major downtrend from the 2011 and 2012 highs (line a) is in the $106.50 area. This is just above the weekly Starc+ band at $104.80.
- The close last week above the prior three-week highs was a positive sign, which makes this week's close even more important.
- The weekly on-balance volume (OBV) formed a negative divergence at the March highs (line b).
- The OBV moved through its WMA in early August, and broke through the bearish divergence resistance at the end of the month. This is consistent with an intermediate-term uptrend.
- On the weekly chart, there is first support at $94.60 basis the December contract, with more important levels at $91.60 to $92.
The daily chart of December crude oil futures shows that first support in the $95 area was tested Monday, with the daily uptrend (line d) nearby in the $93.50 area. The two-bar reversal has turned the very-short-term momentum negative.
- The 38.2% Fibonacci retracement support is at $92.62, with the 50% support at $90.02.
- The volume was heavy at last week's highs and the daily OBV did confirm the price action.
- The OBV shows a clear pattern of higher highs, with good support at the uptrend (line e) and its rising WMA.
- There is initial resistance now at $97.50 to $98 and then $100.
- The upper trend line resistance on the daily chart (line c) is now at $102.70.
The SPDR S&P Oil & Gas Exploration ETF (XOP) broke through key resistance in the $55 area (line a) in early September.
- The February high of $61.81 is the next major resistance.
- Last Friday's close at $59.35 was above the daily Starc+ band at $59.15.
- The relative performance or RS analysis also overcame resistance (line c) and shows a completed bottom formation, as does the weekly analysis (not shown)
- The OBV is positive, as it shows a clear uptrend, but is lagging the price action.
- There is minor support now in the $56 area, followed by the $55 area and the breakout level.
- The 38.2% retracement support from last week's high is at $53.83.
Weatherford International (WFT) shares dropped 15% in March 2011, which started the slide from the highs at $26.25. The low of $10.85 was made in October 2011, which spurred a quick rally.
- So far this year, WFT has basically traded in a range from $13.48 to $11.14.
- Last week, it surged above this range, reaching a high of $14.04.
- The relative performance has just broken its downtrend (line g) and is just barely above its WMA.
- The OBV has bounced from its lows and is now resting on its WMA.
- The OBV has strong resistance now at the downtrend (line h).
- There is next support at $12.60 to $13 and then $11.40 to $11.70.
What it Means: Besides the important of crude oil to the energy stocks, there is often a close correlation between crude oil and the stock market. Crude oil prices are a bit lower early Wednesday, so it will be important how December crude oil acts if it tests the support at $94.60.
The daily and weekly technical studies are still positive for crude oil, and it would take another week or so to suggest that a daily top was in place.
The pullback in XOP looks pretty normal, and is likely to be followed by new highs. Weatherford International (WFT) still has fundamental issues to overcome, but does appear to be in the process of bottoming. Therefore, new longs are recommended for more aggressive accounts at slightly lower levels.
How to Profit: For Weatherford International (WFT), go 50% long at $12.88 and 50% long at $12.46, with a stop at $11.79. Cancel if $14.15 is hit first.
Portfolio Update: Investors should be 50% long the SPDR S&P Oil & Gas Exploration ETF (XOP) at $48.66, with a stop at $51.34 (risk of approx. 5%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.