If you receive my article updates via email alerts, you know we've been monitoring the price of crude oil, the 8% range oil had been trading since last year, and the subsequent break of that range earlier this month.
As we all know, crude oil fell over 9% to 3-month lows following reports of a jump in crude stocks and a jump in oil production from Saudi Arabia.
For those invested in crude via ETFs like the United States Oil ETF (NYSEARCA:USO), or in the stock of Exxon Mobil Corporation (NYSE:XOM), the drop in crude came fast as long positions were stopped-out following the breakout of the several-week range that oil was mired in since January.
In full disclosure, this article is not a comprehensive analysis of Exxon Mobil. I am not a financial advisor, and we will only be analyzing the charts showing how crude oil impacts the stock price and the resulting correlation. There are many factors that go into driving the stock price and profitability of XOM. Before making any investment decision, please contact your financial advisor. And of course, any analysis of past performance does not guarantee future results.
Before we get to the charts, please bear in mind that the technicals don't drive the market (in my opinion), but rather the fundamentals drive the technicals. The technicals (or charting price movements) are simply the paths the fundamentals take to get to their ultimate destination (whether it's higher or lower).
However, the technicals can help investors manage risk by identifying where sell orders may be located within the market. And having a sense as to where these sell orders are located can aid in your risk management strategies for your portfolio.
Chart from last week's article:
- Here's the 9% drop in oil as a result of the fundamentals driving oil lower. With the break of the range (pink channel), oil fell quickly through the long-term channel bottom of the uptrend dating back February 2016 (blue line).
- Good news for the bulls, in the short term, is that oil maintained a higher low as highlighted by the green rectangles.
Channel lines and how they relate to the fundamentals.
As the market moves up and down, the volatility can be dizzying. Drawing channel lines can help us visualize the trend amid market volatility. Channel lines simply connect the key levels of lows and highs in the market, thus creating a visual representation of the direction of the trend.
Chart from March 20th article below:
Here are the key levels that we highlighted.
- A daily close and ideally a weekly close above $50.50 would be ideal for oil to resume its track higher and create bullish momentum.
- One of the reasons I wanted to show this chart again is to draw your attention to the RSI indicator (Relative Strength Index) which measures momentum in the market. If you notice, RSI was below 40 last week which is a bearish signal for crude oil.
- Getting above 50 RSI with a few daily closes above it is critical for maintaining any bullish bounce. And as you'll see from the current charts below, RSI is on the move higher.
Market Risk Alert:
- Still in play, watching for any false rally (to $50.25) as we also highlighted last week in the chart below:
- Be wary of traders selling into rallies:
Current daily chart for crude oil:
- If you notice, the bottom that oil put in (the yellow zone) contains a few bounces in price. The bounces are welcome signs for the bulls. The price action shows that sellers drove oil down, but buyers took over by the end of the day, allowing oil to bounce off the lows. The bullish bounces show up on the chart in the form of wicks at the bottom of the daily candles.
- Each candle represents one day's price action, and the wicks represent a bullish signal that buyers came into the market preventing oil from going any lower.
Again, watch out for the $50.25-50.50 area for a possible retracement lower before any subsequent moves higher.
- The reason the retracement is common in the area of the blue channel line is that traders want to see higher lows before committing to the rally.
- As a result, we may see the red arrow play out where crude falls back and, hopefully for the bulls, bounces (above $47) and moves higher breaking the $50.50 zone. Of course, this is only a possible path oil could choose to take.
A break below $47 invalidates this move higher as traders will likely have sell orders below the level (yellow zone).
- The triggering of the sell orders below $47 will only exacerbate the move down. If you're doubtful of the power of a range break counter to the trend, you only have to look to the range-break and 9% move lower earlier this month.
In tracking bullish moves to the upside:
Here's the same chart below and we notice oil broke higher out of the 5% range it was stuck in after bottoming (yellow zone). It's possible (not definite) that oil may go the length of the yellow range or 5% to roughly $52 if the fundamentals stay bullish and oil stays above $50.50.
The market loves to retest support lines that were previously broken which is why we saw oil bounce to around $50.50 (blue line or channel bottom). We may see oil possibly retrace lower, before going higher as more buyers wait to come back into the market.
- Also, if oil stays bullish, it's equally possible that the market will want to retest the former support (pink line) or the range oil was mired in since last year.
Of course, the fundamentals, not lines on the chart will decide oil's trajectory. However, these key levels are where buy and sell orders may be placed, and increase the choppiness and volatility in the markets; thus, increasing your chances of getting stopped-out.
Exxon correlation to crude oil:
We will only be reviewing how the price action on the charts reacts to the various fundamental factors that might drive the stock in the coming weeks and months.
Exxon Mobil current weekly chart:
From the chart below, we see that Exxon is charting a similar path to crude oil.
- The trendline connecting the lows from 2015 at the end January this year was broken as Exxon fell to a low of $80.31.
- Following this bearish move in the stock, Exxon has traded sideways in a 5% range for the past six weeks.
- As the market consolidates, any break out of this range to the upside or downside would be a significant factor in determining the direction of the stock in the coming weeks. As mentioned earlier, if the fundamentals line up with the direction of the break, the move could be explosive.
Following a range-break, the stock may move the length of the range or the consolidation (although not always the case).
The key levels on the weekly chart:
- A break of $84.85 and a daily close about that level would increase the probability of Exxon testing $86.80 or medium-term resistance.
- On a break above $86.80, and with sustaining momentum from the fundamentals, (i.e. higher oil or a positive earnings report), Exxon may test the former support or red line from 2015, which is now considered resistance.
How Exxon Retrace and Bounce might play out:
Since Exxon's bearish break of the uptrend, there's increasing risk and probability of further downward pressure on the stock. Also, any moves to the upside are likely to be choppy and volatile since any upward move would be counter-trend.
In other words, on any move to the upside, Exxon will be swimming upstream and expect resistance.
- From the bounce starting on March 27th, Exxon rose 3.7% before retracing.
- In doing so, Exxon broke above the blue trendline connecting the highs from the bearish move which started in January.
- The trendline break is a bullish sign in the short term.
- To confirm the bullish signal, look for Exxon to remain above the blue line with a few daily closes above it and ideally a weekly close above it as well.
What to watch for going forward:
- We're likely to see a choppy path upwards as crude oil tries to get above $50.50 and remain there.
- The arrows on the Exxon chart show the possible path of Exxon's stock as crude makes its way higher. Of course, the arrows are merely an illustration of how price might behave in the coming weeks.
- If crude oil breaks higher out of the 5% range (with a daily close above it), it may travel the length of the range to $51.90 or 5% higher from the top of the range.
- Exxon should correlate well to the oil move assuming no negative news from an earnings standpoint or issues within the company.
- The break of the 5% range on crude and probably following a retracement, Exxon may respond in kind by touching $84.85.
- With a few daily closes above $84.85, a test of $86.80 is reasonable provided crude oil cooperates.
- For a bearish move, oil would need to break below $47 while a break below $80.30 for Exxon would resume the bearish trend.
In managing portfolio risk, please beware of a false rally in crude to the $50.50 level where it might run out of momentum. It's possible; traders may begin to sell rallies creating a false move higher and cause crude oil to collapse further.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.