When Exxon has run into the pattern it is currently, it has dropped more than 5% in 15 days, reports Elizabeth Harrow.
Oil major Exxon Mobil (XOM) rallied hard about a month ago, when a drone strike on Saudi Aramco oil processing facilities sent global crude prices skyrocketing. However, XOM quickly topped out around the site of its descending 200-day moving average and resumed its longer-term decline.
The shares have a pattern of finding support around $67, though -- a technical floor that's held up as far back as the August 2011 lows. XOM met back up with this familiar foothold in the early days of October before bouncing higher, as usual, but the energy giant has now barreled into a historically bearish trendline.
Specifically, XOM is now running into its 60-day moving average, which hovers just overhead. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been five prior instances of Exxon stock testing resistance at its 60-day moving average like this over the past three years. Ten days after a test, XOM is trading down 3.6%, on average; 15 days later, the equity's average return is -5.18%, with only 20% positive returns.
Implied volatility on short-term XOM options is currently running right around two-year averages, per White, and the expected at-the-money put return after this latest 60-day pullback could approach the 163% range as soon as the 10-day mark. In other words, the current XOM sell signal could yield a quick double (and then some) on short-term puts before the company even has a chance to report third-quarter earnings before the market opens on Friday, Nov. 1.
And from a contrarian perspective, the sentiment backdrop suggests there's too much optimism priced into underperforming XOM, which has lagged the broader S&P 500 Index by more than 7 percentage points over the past 20 days, on a relative-strength basis. As the stock heads for a confrontation with a historically bearish trendline, a capitulation by some of these bulls could create fresh headwinds.
For example, during the past 10 days, speculative players on the International Securities Exchange, Cboe Options Exchange and NASDAQ OMX PHLX have bought to open 3.32 calls for every put on XOM, highlighting a strong preference for bullish bets over bearish. In fact, this ratio ranks in the 92nd percentile of its annual range, as traders have shown a greater skew toward calls over puts only 8% of the time in the past year.
Elsewhere, short interest is just beginning to build from very low levels. Short interest rose by 11.2% during the past two reporting periods, but accounts for less than 1% of XOM's float. A continuation of this shorting activity could exacerbate selling pressure on the equity in the weeks ahead.
Finally, it's worth pointing out that the stock sports a healthy Schaeffer's Volatility Scorecard (SVS) of 80 (out of a possible 100). This reading indicates that XOM has consistently exceeded the volatility expectations priced into its options over the last year, which means options buyers have been able to reap the full benefits of leverage on the stock's directional moves.
