With stocks and bonds melting down last week, strength is easier to spot than ever. Simply look for stuff that ended in the green. Or, better yet, focus on assets that remain in strong uptrends with support levels intact. In either case, you’ll find the oil complex of particular interest. And that makes energy stocks a trade worth taking.
Last week’s jump to $76.90 took crude oil futures to their highest levels since late 2014. You’ll recall 2014 was the year that oil prices cratered from $107 to $52. I take the fact that black gold is notching new highs as stocks and bonds are faltering as a bullish omen. We want to be seeking relative strength like this, not shunning it.
Thankfully, as I survey oil futures this morning, we’re working on the third consecutive day of a pullback which will provide lower-risk entries. Weakness after new highs is a good thing because it creates a lower-risk entry point.
Here are three energy stocks we can use to buy the dip.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) recently reached its highest level since February. The September rally flashed increasing momentum and created one of the better looking short-term uptrends on the Street in XOM stock. Volume patterns supported buyers’ dominance, with many accumulation days and virtually zero distribution days. With oil’s three-day retreat, Exxon has returned to its rising 20-day moving average.
To capitalize on this low-risk entry, sell the Nov $82.50/$77.50 bull put spread for 86 cents. The potential reward of 86 cents will be yours to keep if XOM sits above $82.50 at expiration. To increase the odds of success, I suggest exiting if you can buy back the spread at 36 cents.
Conoco Phillips (COP)
Conoco Phillips (NYSE:COP) is undoubtedly the prettiest of today’s picks. Like XOM, last month’s rally had increasing momentum. But unlike Exxon, COP’s pullback has been extremely shallow and orderly. The selling pressure has lacked conviction and look at the volume patterns.
High-volume up days plus low-volume down days equals bullish. The past five days have created a bull flag pattern that should lead to a rally this week.
Selling puts spreads in this oil stock looks interesting here. Use the Nov $75/$70 bull put spread, which is trading for 85 cents. Like the XOM example, I suggest taking profits at 35 cents.
S&P Oil & Gas ETF (XOP)
Our final idea offers a diversified route for playing oil stocks. Instead of trying to pick the biggest winners in the space, how about buying the whole sector? The S&P Oil & Gas ETF (NYSEARCA:XOP) offers just such an opportunity.
Last week, XOP retested the upper end of its five-month trading range. The ascent lifted the fund back above its 20-day moving average, which is now rising. The three-day pullback that has settled on the stock looks like a buying opportunity. Continued strength from crude oil should keep XOP aloft for the coming month.
To profit, sell the Nov $40 puts for 50 cents. The reward of 50 cents will be yours to keep if XOP sits above $40 at expiration.
As of this writing, Tyler Craig held bullish XOM and XOP options positions. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.