Stocks have been partying like it’s 1931 this week, with an epic three-day rally that hasn’t been seen since, well, 1931. And though oil didn’t get in on the fun, energy stocks including Chevron (NYSE:CVX) did.
CVX zipped higher on above-average volume, clawing its way back from the abyss.
Today we’re taking a fresh look at the energy sector and laying out a bull and bear trade for Chevron stock.
A perfect storm brought mass liquidation to the energy space this year. A price war between Russia and Saudi Arabia destroyed crude prices which now find themselves on the brink of breaking $20.
The peak-to-trough drawdown of 69% from January’s levels has investors fleeing energy equities in droves.
If that wasn’t enough, energy stocks also have a global pandemic and economic recession to wrangle with. The one-two punch makes 2008’s bear market look like a walk in the park by comparison.
At its low point, the Energy Sector ETF (NYSEARCA:XLE) found itself 77% off its peak. It is against this overwhelmingly bearish backdrop that this week’s desperately needed rally arrived.
Sadly, as powerful as it was, it did nothing to change the structure of XLE’s downtrend. For now, this is a bear retracement and nothing more.
Chevron Stock Charts
As one of the largest players in the energy sector, Chevron has exhibited relative strength and escaped much of the bankruptcy-like behavior seen in smaller companies. The outperformance makes sense. Larger companies boasting better balance sheets have the staying power to push through adverse conditions that smaller, debt-laden players do not.
The weekly and daily charts show the horrific crash that cut the stock in half in one month. But from historic crashes come historic rebounds. CVX stock is up 49% over the past week and could push even higher if bulls press their advantage. The speed of the rise along with the groundswell in volume could suggest we are in the midst of a V-shaped recovery and it’s worth chasing new longs here.
If you’re willing to bet with buyers, I like selling put vertical spreads to acquire a wider range of profits.
Bull Trade: Sell the May $50/$45 bull put spread for around 70 cents.
Bears can make some compelling points of their own. The stock is still in a downtrend beneath all major moving averages. It’s sitting at the descending 20-day moving average which is a logical spot for resistance to form. Chevron has risen too far too fast and could see profit-taking over the coming days. The S&P 500 remains in a downtrend along with Chevron’s sector, so it’s premature to bank on this being the bottom.
If you’re willing to bet with sellers, then bear put spreads offer a compelling risk-reward.
Bear Trade: Buy the May $65/$60 bear put for around $1.40.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!