Energy Stock Update and a Material Pick
08/27/2014 10:20 am EST
Though crude oil prices are currently down over $4 per barrel in August, many energy stocks recorded nice gains, so MoneyShow’s Tom Aspray takes a technical look at the charts of some energy picks as the basis for a change in strategy, plus a new material stock that looks to be a low risk buy.
The global markets are focusing on the S&P 500’s close above 2000 on Tuesday even though the close was near to the day’s lows. Given the 22% jump in Durable Good orders—which was consistent with the strong manufacturing data from the Chicago Fed National Activity Index and the Richmond Fed—the Dallas Fed Manufacturing Survey did come in weaker than expected.
The monthly Consumer Confidence reading from the Conference Board hit its highest level since October 2007. Students of the market will recall that the 2007 bull market highs were made on October 11, 2007. Of course, the technical situation now is much different as then the NYSE Advance/Decline Line had been diverging from prices for many months.
The fact that the new highs have been confirmed by the market internals suggests that a pullback as we head into September should create a buying opportunity. Certainly now is not a time to be chasing the major averages or some of the high flying momentum stocks.
Bitauto Holdings ADR (BITA) along with Facebook, Inc. (FB) were reviewed on October 6 as two of IBD’s top stocks that looked the best. BITA is up over 57% in the past fourteen days, which is quite amazing.
A short-term reason for caution now is that the Spyder Trust (SPY) closed Tuesday 1.6% above its 20-day EMA. It has also formed two consecutive dojis, which is often a sign of a tired market (Three Reasons to Sell).
Though crude oil prices are currently down over $4 per barrel in August, many of the energy stocks have recorded nice gains. A look at the daily charts of some of the recent energy picks is the basis for a change in strategy and a new material stock looks to be a low risk buy.
Chart Analysis: The SPDR S&P Oil & Gas Exploration & Production (XOP) has broken its daily downtrend, line a.
- The quarterly pivot at $78.97 is now being approached as XOP formed a doji Tuesday.
- There is further resistance at $80.36 and XOP made its high for the year in June at $83.27.
- The 20-day EMA is now at $76.38 with additional support in the $75 area.
- The longer-term support and the quarterly projected pivot support were tested last month.
- The daily relative performance has broken its downtrend, line c, and moved above its WMA.
- Further strength is needed to confirm that it has started a new uptrend.
- The daily OBV held long-term support, line e, as expected in early August.
- The OBV is now well above its WMA and it is acting stronger than prices.
- The weekly OBV (not shown) is close to making new highs.
- The daily starc+ band was tested last week and is now at $88.90 along with the trend line resistance, line f.
- The quarterly projected pivot resistance is at $91.83.
- There is minor support now at $85.47 with the 20-day EMA in the $84 area.
- The relative performance bottomed in July and has formed a series of higher highs.
- There is a slight divergence (see arrow), which could be signaling a short-term pullback.
- The daily on-balance volume (OBV) broke its downtrend on August 15.
- The June highs were tested last week with good OBV support at its rising WMA.
- The weekly OBV (not shown) has broken out to new all time highs.
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- The daily chart support, line a, is now being tested with next support at $47.38, line a.
- The daily starc- band is at $46.71 with the preliminary September pivot support at $46.13.
- Soon after ATW was recommended, the RS line dropped back below its WMA.
- Last Thursday, the RS line closed below support and in Monday’s Tweet I recommended closing out the position.
- The daily OBV has also dropped below its WMA as it failed to move above its WMA or its downtrend, line f.
- The weekly OBV (not shown) does look better but is also below its WMA.
- There is strong resistance now in the $49.50-$50 area.
International Paper (IP) is a $20.4 billion paper and chemical company that has a current yield of 2.93%.
- IP was up 1.27% Tuesday but is still 8.02% below its 52-week high.
- It is up just over 1% YTD as it has been testing the 50% and 61.8% Fibonacci support levels.
- The quarterly pivot is at $47.99 with stronger resistance in the $49-$49.50 area.
- The daily RS line did form lower lows but has turned up.
- The daily OBV closed Tuesday above its WMA and has held above support at line i.
- The weekly OBV (not shown) did confirm the July highs and is holding well above its rising WMA.
- The quarterly S1 support is at $46.65.
What it Means: The action in Phillips 66 (PSX) as well as the overall market favors reducing the size of the position to lower the overall risk.
The failure of Atwood Oceanics (ATW) to rally with the market and the technical deterioration was my reason to close out the position for a small loss.
International Paper (IP) appears to be bottoming and a weekly close above the quarterly pivot will further improve the outlook.
How to Profit: For International Paper (IP) go 50% long at $47.72 and 50% long at $7.33 with a stop at $46.44 (Approx. risk of 2.3%).
Portfolio Update: Should be 100% long Phillips 66 (PSX) at $82.66. Sell 1/3 on the opening and use a stop at $79.79 on the remaining position.
Should be 100% long SPDR S&P Oil & Gas Exploration & Production (XOP) at $74.50 with a stop at $72.31.
For Atwood Oceanics (ATW) was 50% long at $48.44 sold at $48 for a 1% loss.