Oil prices have been strong for weeks and consensus is that they are headed much higher. Yet energy company stocks are not shining. Exxon Mobil (NYSE:XOM) stock is barely keeping up with the S&P 500, up 18% year to date when the United States Oil Fund, LP (NYSEARCA:USO) is up around twice that much. Furthermore, the S&P 500 is setting all time highs when Exxon stock is 20% below its highs.
So the now that oil hype is fading, Exxon Mobil stock is vulnerable for a deeper slide. And that’s the point of today’s note. This is nothing against the company itself, it’s a pure examination of its price action.
The good news is that the short-term bounce off the December lows was impressive. Exxon stock rallied almost 30% from the Christmas lows, but then it hit a wall of resistance.
The area around $81 per share is a 12-month point of interest, so this is where bulls and bears agree on value and will fight it out vigorously, thereby creating resistance on the way up.
The Present and the Future for XOM Stock
Then on Friday, management reported earnings, and the news was not good. They missed on both the top and bottom lines by a wide margin. More importantly they lowered their forward guidance, which is a sure trigger for traders to sell the news … for now.
Eventually, XOM will find support and recover. This is a quality company whose stock has reasonable value. It sells at an 16x trailing price-to-earnings ratio and yields more than 4% in dividends. Chevron (NYSE:CVX) stock is slightly cheaper, but there is no reason to panic out of XOM at this point.
However, this depends on the investor time frame. If I own XOM stock for the long term, then a dip on earnings knee-jerk reaction will not shake me out. Yes, the point of interest is resistance but it is also support because it represents value for both buyers and sellers. So it is sticky.
And since Wall Street rejected the December lows so emphatically, it says that the drop then was too deep and is not likely to repeat. So even if this is not the bottom of the earnings dip, there likely isn’t a chasm below.
Furthermore, the weekly chart shows that Exxon stock has been trading in a descending channel. And since the support level is likely to hold, then the stock could finally break out of the descending pattern of lower highs. In essence, there could be a bounce brewing.
Most analysts on Wall Street rate XOM stock as a hold, so they agree with this note that it’s not time to panic sell yet. On the other hand, they see no rush to go all into it either.
This is not the type of stock to trade actively for short-term scalps, so if the goal is to own Exxon shares for the long term then it’s not important to wait for the perfect level to buy the whole position. Starting a bit of it here is a viable strategy.
But since the stock market in general is at all-time-high levels, it is prudent to take bullish positions in tranches. This way I would leave room to add to my positions if lower prices come.
For those who can trade options, there are many ways there to complement the XOM strategies. Selling puts and/or buying calls are also two simple ways of also getting long Exxon Mobil stock.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
