The price of oil took a breather from a nine-day rally on Tuesday, pulling down with it most oil-related stocks as well. Shares of independent oil exploration and production company ConocoPhillips (NYSE:COP) lost nearly 7% on Tuesday after the stock became overextended on the upside and in what may be a move that could see follow-through selling in coming days.
While there were some pockets of marginal strength in Tuesday’s trading session, it also served as a stark reminder that much of the directional pull of stocks still depends on movements in the price of oil.
The S&P 500 on Tuesday saw its biggest one-day drop in a couple of weeks, and the energy sector — as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) — fell more than 4%. So, to ignore the volatility in the price of oil still means being ignorant to one of the most significant catalyst for directional moves in the stock market.
Because oil prices don’t give very clear near-term trading signals, however, I tend to look to oil-related stocks for better clues. Case in point: While oil pulled back Tuesday, stocks like ConocoPhillips dropped more in percentage terms, and thus visually showed a better bearish reversal.
ConocoPhillips (COP) Stock Charts
The strong multiweek rally in COP stock saw it push back up toward horizontal resistance near the low $40s as marked by the horizontal line, which has served as a good spot of resistance and support off and on over the past decade or so. ConocoPhillips still very much remains in a primary downtrend; you want to sell rallies in this case.
For a better intermediate to longer-term bottom to form, I would like to see some positive divergence between price and momentum oscillators such as the MACD at the bottom of the chart. When COP stock began to bounce in February, this also coincided with a low in the weekly MACD, which ultimately speaks for another leg lower in ConocoPhillips until such time where momentum oscillators make a higher low versus price.
On the daily chart, we see that COP stock on Monday attempted to extend its four-day rally, but despite closing marginally higher on the day, it also closed well off its intraday highs. This was followed on Tuesday by a down-gap at the open and a significant down-day.
All of this coincided with horizontal resistance (former support) and ConocoPhillips becoming very extended above its yellow 21-day moving average.
Active investors and traders could now use Tuesday’s follow-through weakness to leg into a tactical short position in the stock for a move into the mid- to low $30s as a first target and using Monday’s daily closing level near $41.40 as a stop-loss.
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