Big oil stocks have acted well in recent weeks, with the crude-oil futures contract firming up nicely after a volatile selloff down to $90. Refiners and service companies are both attracting healthy buying interest, and many of these issues are set to test their 2011 highs in the third quarter. I expect long-term rallies to be set into motion once these resistance levels are mounted.
Oil Services HOLDRs Trust
, is trading at its 2008 high right now. In contrast, thousands of stocks in other sectors have pushed above that final barrier of the bear market era and are trading at all-time highs. This is an important observation; gains tend to be strong and persistent at those technical levels, because there's no overhead supply to absorb.
These sector giants tend to trade with the equity markets during periods of low volatility, when economic growth considerations dominate the headlines, and tend to trade with the crude-oil futures during periods of crisis and market disruption. As a result, it's no surprise that the group is outperforming the
this summer, with the HOLDRs pushing well above the July 8 high while the index remains stuck under that level, held hostage by the U.S. debt crisis.
Two views of the fund are required in order to understand its current price positioning. First, the weekly charts show the massive bear market decline, followed by a two-legged recovery that slowed considerably when it reached the 62% selloff retracement at $165 in February of this year. The fund has now spent more than five months attempting to overcome this significant barrier.
Two dynamics will come into play on a breakout toward $170. First, the door will open to a rally that reaches the 78.6% retracement at $193. That would mark a significant move above the current price level. Second, the recovery that started in 2009 will began its third rally wave. An uptrend that equals the 2010-into-2011 wave would lift price into the vicinity of the 2008 high, as a minimum target.
However, the fund has work to do before pressing up to that hallowed ground. The month-long bounce just reached the 78.6% retracement of the April into June selloff. I'm looking for the rally to stall and a basing pattern to emerge near this level, ahead of an assault at the March high. Price might even roll over and test new support near $155 during this period. If it does, it should mark a low-risk buying opportunity.
Accumulation off the June low, as registered by on-balance volume (OBV), has been steady but unremarkable. If the fund fails to consolidate recent gains and goes vertical right here, the rally will trigger bearish volume divergences, because volume won't have time to catch up with price development. For that reason, I wouldn't chase an entry, thinking you're buying a bargain, with just a few points up to major resistance.
While Halliburton shows the most bullish pattern in the HOLDRs,
National Oilwell Varco
could produce higher returns in the next six to 12 months. The stock rallied to within 10 points of the 2008 high in March and entered a correction that found support at the 200-day moving average in the mid-$60s. It bounced in May and returned to the high earlier this month, where it's grounding out a rounded consolidation pattern.
This is a good setup for a breakout and rally up to multiyear resistance at $93, despite Tuesday's reversal. Just wait until the downside washes out and a new base sets up between $80 and $82. Look for a pullback once the stock reaches the $90s, but your patience should eventually be rewarded with a rally into triple digits. Position traders with shorter-term time horizons can go ahead and take profits on the initial buying spike into resistance.
You can also play big oil through the highly capitalized integrated companies, such as
. Chevron shows the most bullish technicals of these three energy giants, helped along by a substantially higher dividend, at 2.90% forward yield, than its blue-chip competitors.
Chevron topped out at $104.63 in 2008 (blue line), dropping to a two-year low at $55.50 during the crash. The recovery stalled in the low $80s for nearly two years before giving way to a powerful rally that reached the high in March of this year. The stock broke out to an all-time high one month later, stalling at $110 and dropping into a rounded consolidation that should complete a multiyear cup and handle.
These classic patterns exhibit fractal dynamics in which market-timers can wait until the big handle carves out a smaller-scale cup and handle. The stock rallied back to the high for the first time last week and pulled back. A rounded base above the 50-day moving average would fulfill these fractal requirements, setting the stage for a powerful run that could reach $150 in 2012.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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