Oil prices have been choppy lately, but they are trading in a well-defined range. This makes trading energy stocks difficult, especially from the bullish side. Expecting rallies to sustain has not yielded results for investors. But there are still three energy stocks you can trade today to profit from the space regardless of where crude oil prices go in 2020.
Oil has been under pressure for the last few years from falling prices and high debt levels. It takes big commitments for them to operate so they are stuck in a jam. So the safest companies to trade are the two biggest ones, which are Chevron (NYSE:CVX) and Exxon Mobile (NYSE:XOM) stock. Alternatively one can trade the Energy Select Sector SPDR Fund (NYSEARCA:XLE) since these two stocks comprise 43% of it. And the top four stocks in the XLE make up more than half its holdings.
First we have to acknowledge that the energy oil trade is a manipulated market. The Organization of Petroleum Exporting Countries (OPEC) sets prices and production levels on a daily basis. So the price movement is not always in line with the fundamental supply and demand rules.
This puts the best strategist at a disadvantage. So the best way to trade energy stocks in this environment is to expect the ongoing range to hold and profit from it. Meaning, I don’t expect a breakout from either sides of the range.
As crude oil prices approach $60 per barrel, it will find resistance. Conversely, if it falls near $50 per barrel it will find support. So trading XOM and CVX stock based on this range will yield the best results short term. With that in mind, let’s dive deeper into each of these stocks and the exchange-traded fund.
Energy Stocks to Trade Into 2020: Chevron (CVX)
Although CVX stock trails the S&P 500 by a whole lot, it has manged to perform better than XOM. But both stocks are languishing this year with not much relief in sight.
Nevertheless, I prefer trading CVX for income. So rather than invest in it for the long term, I swing trade it within the range. Back in September, I wrote about the possibility of Chevron stock breaking out of the $126 per share resistance level. But I also suggested to better sell CVX January $110 puts to generate income. The trade yielded easy profits. Buying the stock outright then would have lost us money.
So going into next year, there is time to rinse-and-repeat the same process for anyone looking to trade CVX before its next earnings report. The same setup is still available, but with lower potential profits due to time constraints.
Chevron has held the $110 level as support for a long while, so I can count on it for as long as we don’t have a black swan event.
It is important to note that by selling naked puts, you commit to buying the shares at a discount from current price. So, even with the worst case scenario, you would have a 5% to 10% buffer from current levels. Alternatively, I can sell a put spread instead to limit the risk.
Exxon Mobil (XOM)
XOM stock trades similarly to CVX, but it trails at a bit in performance. It is also more expensive fundamentally speaking, but only slightly so. XOM stock has had four major failures in the last few months. In April and July it collapsed 14% from $83 and $78 per share respectively. In September, it again fell 11% from $75 per share. And in November, it has already fallen almost 8% from $73 per share. So we have a clear descending lower high trend in XOM stock.
But the good news is that so far, the $66 per share support line has held flat. So this could be a base from which the bulls can finally break the descending trend line. But, again, instead of hoping for a breakout, the better bet is to sell into what others fear below.
I would rather bet on proven support continuing to hold than hope for a change in trend.
I suggest selling the Jan XOM $65 put and collecting almost $1 for the risk. The worst case scenario is that if XOM stock falls through my level, I would own it but won’t accrue losses until it falls below $64 per share. This is a more attractive scenario then buying the shares and hoping the stock breaks out.
Energy Select Sector SPDR Fund (XLE)
The third way of trading energy stocks is to use the XLE ETF. This is very similar to trading the other two stocks because they cmake up almost half of XLE’s holdings. So like XOM and CVX, the XLE is mired with the same issues.
It has been setting lower highs but also holding above a floor that has held for years. Conversely, it has suffered from heavy resistance around $64 per share, as this has been a pivot point for more than 10 years. Contentious zones like this are not easy to breach, so the bulls have their work cut out for them.
This is a ticker I would not buy and hold for the long term. Trading XLE stock has to be tactical. So this is best done through the options markets. The open interest for January shows that it has support near $55 per share. So I find it most attractive to sell puts or put spreads in that zone to generate income rather than buy-the-hope that the bulls will finally break through the negative trend line.
In all three trade setups for CVX, XOM or XLE, it is important to define the trades from a timeline and risk tolerance perspective. Not all traders are the same, so there is not one set up that works for all investors alike. Another note of caution is the headline risk that exists in the oil markets. Drama tends to come out of nowhere just like the drone attacks on the Saudi oil facilities. Therefore, conviction in any oil trade has to be tempered.