Rhodes: Oil Patch Play

12/13/2002 12:00 am EST


Richard Rhodes

Founder, Rhodes Capital Management

Many technicians get so complicated that investors are left shaking their heads in confusion. Richard Rhodes, however, is an exceptional technical analyst who still believes that "simple works best". He focuses on common sense criteria and emphasizes strict money management principles and trading rules. Although much of his trading portfolio is currently in short position, the editor of The Rhodes Report has just issued a "long" recommendation.

"For our latest long position, we turn to the 'oil patch' and are recommending Chevron-Texaco (CVX NYSE). At present, oil prices have risen in fairly modest manner off their trading lows. Technically, the 48-week moving average did indeed hold the recent price decline. The potential for rising crude oil prices is creating the potential for rising share prices in many of the integrated oil producers, and more specifically CVX. Of further significance CVX yields 4.3%, which will tend to put a floor underneath the share price. Hence, support is substantial, in our opinion.

"Looking at the weekly chart, we find the stock price has traded substantially lower since May 2001, with the bulk of the decline having come since June of this year. And it is precisely this decline that piques our interest, as prices have returned back towards technical support at $65 1/2. This level held the stock's previous declines in 1983, 1987, 1992, 2000, and the present time. Thus, one would do well to become long on these shares based upon this simple indicator, especially in light of the fact it pays you a dividend while you hold the stock.

"Based on this evidence, we are going long this stock. If we are wrong in our assessment (and we do not believe we are) then we believe that in the short-term, prices can at a minimum easily return to upwards of the $75 to $80 region based upon a snap-back counter-trend rally. Overhead resistance lies at the declining trendline crossing at $69.50, and if prices are able to trade above this level, then the probability of an upside acceleration is materially increased. Then, the 80-day moving average crossing at $71 becomes first level resistance, followed by the October highs at $75, and finally followed by the August highs and 200-day moving average at $80. Conversely, our risk is a decline beneath the recent lows at $65.50. Overall, we believe the risk-reward is quite favorable."

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