Petroleo Brasileiro Petrobras SA (ADR): Stay Put Below Long-Term Resistance in Petrobras

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A substantial dead bull bounce into key resistance, earnings risk removed and maybe not yet wholly deserved of the benefit of the doubt — make Petroleo Brasileiro Petrobras SA (ADR) (NYSE: PBR, NYSE:PBR.A) a target for bears in Petrobras stock wanting to prosecute with a long put strategy.

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They say bears live below the 200-day simple moving average. In state-run Brazilian energy giant Petrobras, that dictum is being put to the test. But rather than believe bulls have been released from their technical jail cell just yet, a bearish speculation looks compelling.

A potentially large risk for traders has been removed in Petrobras and one which appears to be favoring bears. After the market closed last Friday, Petrobras announced its first earnings report since its notorious corruption scandal that rocked PBR shares over the past year and one which ultimately forced the uprooting of the company’s old guard with a new management team.

Petrobras’ new-and-improved first report under the fresh top brass was far from dire. Profits of $1.8 billion only declined 1.2% year-over-year and earnings did manage to more than double Street forecasts. Owing to the results, an end to fuel subsidies and a 22% drop in operating costs were large factors.

Regarding the latter corporate belt tightening, a good chunk of that reduction was forced and the result of a 13% drop in investments. Prior, Petrobras’ investments had operated as an illicit web of bribes and kickbacks involving contractors and politicians.

Petrobras Daily Chart

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Source: Charts by TradingView

Should Petrobras management and PBR shares be given the benefit of the doubt and receive a get of jail card? Based on Monday’s reaction thus far and traders’ first opportunity to position in the name since the report’s release, it doesn’t appear so.

Following a minor upside gap to test the 200-day simple moving average, traders have reversed course. Petrobras shares fell about 4% Monday to near $9.70.

The classic “sell the news” style reaction comes on the heels of an approximate and mostly unabated 100% increase or near double in Petrobras share price since mid-March. With that in mind, it’s easy enough to anticipate bulls booking profits still have ample room to continue doing so in the coming days and weeks.

At the same time, that anticipated preoccupation could provide significant opportunity for bears to profit too. Looking at the chart, a simple Fibonacci pullback from 38% to 62% shows there is still plenty of room to position in a bearish capacity without having to revisit the lows or even be overly bearish on Petrobras’ future prospects.

In fact, I suspect traders could position as bears right now but maintain ambitions to ultimately reverse those short bets for a longer-term bullish play, once some additional testing and profit-taking come into play.

Petrobras Long Put Strategy

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Source: Charts by TradingView

In reviewing the Petrobras volatility chart, post earnings hasn’t resulted in a volatility crush. But as we can also observe, premiums and the underlying stock movement are as low as they’ve been for the last six plus months; thus there’s less reason for a crush to develop.

Additionally, its anticipated volatility won’t simply realign itself with its former pricing near 40%. Our view is it’s going to take at least another earnings report before and if it does manage that feat. That said, a long premium position like a bearish purchased put strategy becomes a bit more attractive given our expectations for Petrobras stock.

At last check, the Petrobras Jul $9 put is trading for 55 cents and priced well for the opportunity to make some profits on a test of Fibonacci levels. For instance, if PBR merely challenges the upper 38% level near $8.50 in the next two weeks; the put would be trading for 90 cents to perhaps $1 or a profit range of about 60% to 80%.

At the same time, given the current directional delta risk in the low 30s, should shares of Petrobras get through the 200-simple moving average, money management would allow the trader to exit for about a loss of 25 to 30 cents rather than relying on the max debit paid as shares move counter to the described thesis — and an obvious reason to exit.

As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/petroleo-brasileiro-petrobras-sa-adr-stay-put-long-term-resistance-petrobras/.

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