Optimism on Petroleo Brasileiro SA Continues

01/05/2009 11:10 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

On Friday, I noted that Petroleo Brasileiro SA (PBR) saw some call activity on Wednesday, so I wanted to check back in on the stock. In mid-November, I offered that Petrobras had been a favorite of the hot-money crowd and was a gauge for the willingness to take on risk. Shortly after that post, the stock found a bottom and then rallied into near-term resistance. A look to the chart below shows the stock successfully overtook that hurdle and is now testing another key point.

Chart Courtesy of Thomson Financial

The shares are up 4% here and pushing into their mid-December highs. This is an area where sellers had previously come in, so you would expect to see more of the same. It is also worth mentioning that the stock has pushed into a short-term overbought condition. The last time the Relative Strength Index (RSI) was near 70 was the December peak.

A look to put/call ratio chart shows that Wednesday's call activity is part of an overall trend and continues what we saw in November.

One small difference though is the opinion on the Street. According to Zacks, 5 of 7 analysts now rank the stock with a "buy" rating. This is down from all of the analysts rating the stock as a buy.

Overall, there is still too much optimism for me to call this a good contrarian long trade. However, I still think it is worth watching as a proxy for risk taking. The stock is overbought and pushing into short-term resistance, which in theory should set the stage for a pullback. The more telling reaction would therefore be a breakout.

By Nick Perry of Schaeffer's Trading Floor Blog

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