Oil Stocks May Be Losing Energy

Oil and gas stocks have been on fire lately. With the price of oil now hitting $44 a barrel, investors just can't seem to get enough shares of anything related to this industry.

However, as I've said before, the market is forward-looking. It already knows about the rising cost of oil, and as the search for oil intensifies, it knows the oil-services industry will stand to make a lot of money.

All information, hope, doubt and uncertainty are already factored into the current prices of stocks. That is a fundamental tenet of the study of price and volume data -- of technical analysis. So when I continue to hear about the rising cost of oil, I'm not necessarily bullish on oil stocks. Instead, I want to look at how the stocks are trading now.

If oil is expected to go higher still, then could these expectations already be reflected in current stock prices? If so, then how can these stocks go any higher, except on the backs of retail traders and investors, who are often last to the party?

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If this is the case, then we should see evidence of distribution of the oil stocks by those investors who caught most of the ride -- i.e., those stockholders who are now closing out their long positions by selling to the latecomers.

Let's look at the charts.

Schlumberger

Schlumberger (SLB - commentary - Cramer's Take) is just now forming a double top. After peaking in early 2004, the stock is once again hitting $65.

This could be a precursor to a breakout to new highs, but the accumulation-distribution, or A-D, line is declining. This is a negative divergence that spells trouble. The money flow oscillator, which gauges buying vs. selling pressure, is likewise showing a negative divergence. The selling pressure during the recent decline to $55 was expansive, while the recent high in buying pressure was quick and of much smaller amplitude. Simply put, this is a stock that is being sold on strength.

ConocoPhillips

ConocoPhillips (COP - commentary - Cramer's Take) was trending nicely during 2003 (Trend 1), but accelerated during 2004 (Trend 2) to what I believe is an unsustainable rate. While the A-D line continues to trend higher, the 20-day moving average is beginning to flatline. This is a stark contrast to the rapid rise in price.

While money flow favors buying pressure, it is inconsistent. Also, weekly volume has declined during the past couple of months, even while the rate of price advance has picked up. The relative strength index, or RSI, is also showing a slight negative divergence. So while I wouldn't short a stock showing this much strength, I would look to take profits if the current support trend line is broken.

Halliburton

Halliburton (HAL - commentary - Cramer's Take) has been trading sideways for the past six months. Volatility is quite low, and the stock is poised for a breakout, but which way? With the price now in the upper half of the Bollinger Band complex, I'd expect an upside breakout. But accumulation ceased four months ago, and buying pressure is almost nonexistent. Now, we shouldn't expect to see much buying/selling pressure during volatility squeezes. After all, the reason why a stock trades in a tight range is because of the impasse between buyers and sellers. But RSI is declining, and that would make me suspicious of any upside breakout -- especially since the rest of the group looks pretty weak.

ChevronTexaco

ChevronTexaco (CVX - commentary - Cramer's Take) remains in an impressive uptrend after breaking above $75 last November. At first glance, the A-D line shows continuing accumulation, but the 20-day moving average of the A-D line is flat. This stock is no longer being accumulated on a weekly basis. Money flow is making successively lower highs, which is bearish. While RSI remains strong, it is also making lower highs than it was in early 2004. I wouldn't short this stock, as it's never a good idea to stand in the way of a runaway freight train. But I think this uptrend is losing steam, and I'd keep a tight stop on any long positions.

BP

BP (BP - commentary - Cramer's Take) is another stock that has been trending nicely, but there are some leaks in the gas tank. After breaking out at $50 in March, this stock has run almost 15% higher. But look at the ominous money flow. Buying pressure has just dried up. The A-D line is flat, indicating that accumulation is nonexistent. And while RSI remains near the top of the range, each peak is slightly lower than the last. You might want to consider tightening your stops on BP.

Be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].