After spending a few days on alternative-energy plays, let's look today at traditional big-cap integrated oils and exploration and production companies. Investing in this space requires a lot of discipline right now -- there are more misses than hits -- but a few names stand out as worth a look.
Our observation of
suggested that alternative energy was more promising than the integrated oils (as tracked by the
Energy Select Sector SPDR
) and the E&P sector (as tracked by the
Oil Services HOLDRS
) for the time frame of interest. It wasn't a coincidence that the past couple of days have seen us focus on the alternative-energy sector -- for this time frame, it was the obvious choice.
For the short- to intermediate-term time frame, the XLE and OIH sector charts indicate that we should see a period of consolidation at best. That consolidation range is rather large -- from $47 to $60 on the XLE and from $88 to $130 on the OIH. That amounts to a 25% to 30% range top to bottom. The buy in these two sectors, for the most part, is at the bottom end of this large range. That buy is conditional, though, and based upon the volume characteristics exhibited at that time.
In the large integrated oils, the only one that catches my eye currently is
. On the long-term chart, COP is bumping up against a wide resistance band that could contain it awhile longer given that the sector is under pressure.
From a long-term perspective, there is huge support now at the $46 level from the large candle that has served notice to all that this stock intends to move higher. If we shorten our view to the intermediate-term time frame, the support zones crystallize. Not only is the $46 area a buy, but one could look to start the position here in the $49-$50 range and add lower if it gets there and volume behaves.
Notice how COP has telegraphed its intentions with a huge volume spike over the June highs. As you search for trades, always look for a significant sign of strength, such as that displayed here. This volume spike shows the urgency that happened when buyers were convinced that they needed to pay up to get in. Urgency doesn't just happen, and it usually doesn't just go away either.
In the production and exploration sector, I haven't found any charts that I would look to buy near term, and I've flipped through a stack of them. So rather than invent a buy, let's instead consider the vetting criteria for when to buy.
How do you decide when it is time to buy some P&E energy stocks? Ideally, you want to keep an eye on the sector chart and wait for it to retrace to the false breakout area and regenerate or confirm that it wants to go even lower. At the same time, you want to watch the stocks you're interested in and observe how the stock behaves as it retraces back to the lower swing points.
Here's a blowup of the monthly chart for
that we can use as an example.
The swing point that was broken on the way up was from May. That swing point had 193 million shares traded for the month. In August, the swing point was surpassed on share volume of 98 million. If you have an interest in this company, you want to see prices retrace to the May highs of $52.12, since that was the swing point that was removed without volume confirmation.
You want to see that retracement because that was the lower level the stock used to trade in, and you need to know if it wants to operate on the first floor or the second floor before you pay second-floor prices. I just hate to buy anything today only to find see it on sale the next day.
If prices touch that $52.12 price point, you want to compare volume to what we saw back in May. Are there more sellers or fewer? Since you are retreating in price, you want to compare against the harder of the two volume numbers -- in other words, the lower volume number of 98 million from August. You want to see fewer than 98 million shares trade, and you want the closing price to close over the price point being tested for the month. That gives you the full test.
If all that happens, insufficient sellers will probably be unable to take prices even lower. That lets you know that the bargain prices are today and there won't be a blowout sale tomorrow.
For those of you who have been following, a number of contributors have shared many ideas about the energy sector over these last four days. Some will work out, some won't. That's trading. You have to use these ideas as just that -- ideas. With a little effort and a whole lot of discipline, many of these ideas will bear fruit if you just keep your time frames in perspective. For every idea that sours, another bears fruit.
Good trading to you, and until next time, keep trading the charts!
By L.A. Little of tatoday.com, author of
L.A. Little is an author, professional trader and money manager who writes daily on
, a free educational site for traders and investors. He has been featured in Stocks & Commodities magazine and is the author of