Make no mistake about it, the energy oil trade is a manipulated market. Major entity Organization of the Petroleum Exporting Countries (OPEC) sets prices and production levels. This makes it difficult to trade energy stocks with confidence. But this is an aberration that I can use to my advantage to easily profit from them. Today we examine the opportunities in Energy Select Sector SPDR Fund (NYSEARCA:XLE), Chevron (NYSE:CVX) and Exxon Mobile (NYSE:XOM) stocks.
It is amazing how often the experts are wrong on energy stocks trading. I have had consistent success simply trading their fundamentals and charts. What also helps is to acknowledge the fact that OPEC matters and they will keep crude oil prices inside the zone they need. When crude prices rise above $60, OPEC will bring it down so they don’t lose market share. Conversely, they prop prices up when they fall too far below $52 per barrel.
To successfully trade this notion I use mega-cap energy stocks like CVX and XOM. Or I use the ETF XLE instead since these two stocks make up almost half of the ETF. When it comes to trading, they are the Apple (NASDAQ:AAPL) of the energy sector and carry little risk of failure.
If I cannot bet on them long-term with confidence then I should not be trading at all. These had upside potential in early July but they never triggered. For example, XOM failed to break through $78 per share which left it vulnerable to the sharp correction that ensued. Similar setups happened in CVX and XLE.
Energy Stock to Trade Now: Energy Select Sector SPDR Fund (XLE)
Trading XLE stock has been difficult. It trails the S&P 500 and the United States Oil Fund, LP (NYSEARCA:USO) by about 15%. Clearly it has not been easy to bet on these stocks in spite of a healthy economy. But there is opportunity looming just above current prices.
First we have to make sure that the XLE stock has a good base from which the bulls can spring. The good news is that it recently confirmed support at $56 as it bounced off of it into a 14% September rally. The bad news is, it now faces $64 per share which has been resistance. But therein lies the opportunity because breakouts often have to fail at their first face-off with resistance. Nevertheless, onus is on the bulls to retest and break through resistance on subsequent tries.
Once the XLE rises above $64 then it can spring into a $5 rally from there. There will be resistance at $66, but with the right circumstances and market-wide momentum, XLE stock can do it. It is important to note that $64 has been pivotal since 2006 so it will be sticky. This means that buyers and sellers love to fight over it and will likely continue to do so this time around.
Chevron (CVX)
Of these three, CVX stock is my favorite. Chevron stock bounced well off of its confirmed support at $114 per share from the August correction. Luckily the bulls have almost erased the entire dip. From here the buyers are in control of the price action, however, they do have to contend with resistance above.
CVX stock has failed to break through the $126 per share resistance zone for over a year. This marked last October’s accident scene, and the more recent failed attempts from March and July. In spite of that, if the bulls are persistent they can eventually break through the neckline and overshoot hired. The target from that would be a healthy extension of the current rally that could target $135 per share.
Admittedly, I don’t like to buy and hope that a rally unfolds. So in this case and since I have proven support, I would much rather sell downside risk into what others fear. This way I can create income without any out-of-pocket expense.
For example, I can sell the January CVX $110 put and collect $2 for it. As long as CVX stock stays above my level than I retain my maximum gains without needing a rally. In fact the stock has to fall 13% before I start losing money. Worst case scenario is that I own CVX shares at $110 and accrue losses below $108 per share.
Exxon Mobil (XOM)
Exxon Mobil stock is similar to Chevron but with slight variations. It is lagging CVX year-to-date by about six percentage points. Moreover, it doesn’t have the same clear confirmation of a bottom. Yes, XOM stock did bounce off a prior support level at $66, but the price pattern was different because of a failed attempt at $70 per share.
Normally I would prefer selling downside risk as opposed to buying upside hopium. But XOM has a clearer breakout opportunity than CVX. The neckline above seems easier to breach since it is so much farther from the October ledge. If XOM closes above $75 per share it would trigger a buying program worth a $5 rally. It is important to wait for the breakout confirmation before chasing it. Otherwise I’d be anticipating and hoping things go my way. This also means that I may miss out on a few bucks while I wait and that is O.K. in my book.
The general markets can make or break these potentials. XOM and CVX are stocks of actual companies, so they will rally with the stock market indices regardless of oil status. The XLE would follow in sympathy because these two comprise almost half of it.
There is also an element of surprise baked into the price of energy. The fact that Saudi Arabia suffered a drone attack builds up the anticipation fear of another one, meaning the price of oil has hidden support from this. Fewer traders dare short it because of the possibility of such headlines for some time to come. We just saw oil spike almost 20% on this event so it will have lingering effect on traders.
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. Join his live chat room for free here.
