As we wake to yet another volatile market due to the ongoing Greek drama, allow me to remind you that through the lens of risk management the current environment lends itself badly to making big overnight bets as gaps up and down in the broader indices will be prevalent.
At the margin, equally low probability is trying to swing trade single name stocks as most of them correlate highly with the broader market in the near term. So this is a good time to take a step back, look ahead at the upcoming earnings season and see whether we can find some bigger picture market imbalances to take advantage of through a multi-month lens.
Shares of integrated oil giant Exxon Mobil (XOM) is flagging one such imbalance that I am watching at the present, as XOM stock is showing some negative divergence from the price of oil and after a sharp drop over the past 12 months, the stock increasingly looks ready to form a better bottom.
In the bigger picture I remain of the opinion that the second half of 2015 will look entirely different than what the first half had to offer, namely more volatility and ultimately into the fourth quarter better directionality, i.e. a good size and broad equity rally. In order for this rally to manifest, however, the energy sector, which is down about 6% on the year, will need to participate, which is what I increasingly foresee happening.
Exxon Mobil is scheduled to report its next batch of earnings on July 31, which could be a good toggle point for the stock and a day that investors and traders alike would be wise to closely watch the price action in the stock.
Starting off with the multi-year picture, on the chart below I plotted the United States Oil Fund LP (ETF) (USO) in the top half versus XOM stock at the bottom. What we see is: a) XOM stock is coming into diagonal support, and b) the price of oil bottomed in March and bounced while XOM stock last week marginally undercut the March lows.
While more confirmation is needed from price action (bullish reversal in XOM stock), this positive divergence, i.e. oil potentially flagging that it has bottomed, could be foretelling of a better rally in XOM stock and the broader energy sector in the second half of 2015.
Zooming in on the daily chart of XOM stock we see that the downside momentum has been making a series of higher lows and that particularly last week’s new year-to-date lows in the stock saw a higher low in the Relative Strength Index (RSI), i.e. positive divergence which often sees the oscillator as a leading indicator, in this case pointing to a bottoming in the stock price.
What is still missing here is either a better washout in the stock followed by a bullish reversal, or a bullish reversal off current levels that confirms last week’s marginal new year-to-date lows as an important low. Either move would allow active investors to take a stab at XOM stock from the long side with a multi-month price target well into the $90s.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan,TheEssence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.