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Oil Stocks Reach Max Move Upside Limits: Shorting Made Simple

|Includes: ConocoPhillips (COP), CVX, XOM

Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP) and Chevron Corporation (NYSE:CVX) have all rallied for multiple months. Why has this rally taken place and is there an opportunity to short them for their coming dip? The answer is yes, money can be made shorting these plays in this range. All three of these stocks are into resistance and have maxed themselves out in the near term. In fact, with an up market today, you can see they are all trading slightly lower. This shows relative weakness and tells us that any drop in the market will see these stocks dip heavily.

Why have they been so explosive of late while the market has seen such volatility and weakness? The answer is two fold. First, they all pay large dividends and are known as safety stocks. This means when things get scary, money has been rotating into them as a safe haven trade. In addition, look at the chart of oil in the last month or two. The price of oil has increased dramatically, hovering over the $100 per barrel level. Increased tensions between Russia and the west has helped stoke them higher. Also, let's not forget the driving summer season is upon us. All these factors have helped the energy plays surge.

What will bring them down? Waning fear over Russia will help bring energy prices down. In addition, as the Federal Reserve withdraws more quantitative easing, the economy will get slightly weaker as the Dollar gets stronger. Also, expectations for earnings on these companies is sky high. Expect them to perform decently but investors to take profits on those results.

These factors will bring energy stocks down about 5-7% in the coming weeks.

Gareth Soloway