Oil stocks are finally returning to Earth, after an astounding ascent. It’s a desperately needed development for an area that became way too overbought. And, it’s making stocks like Marathon Oil (NYSE:MRO) mighty attractive for new bull trades. After breaking down the recent action in crude, I’ll update you on the MRO stock setup and outline how to play it.
When I’m analyzing a stock, it usually pays to begin with a chart of its sector. It provides context by revealing whether the sector is bullish or bearish and whether it’s leading or lagging. When it comes to energy stocks like Marathon, however, I also look to the underlying commodity for clues. Marathon’s stock boasts a positive correlation to crude oil, so we usually see them moving together.
Resistance Looms for Oil
The uptrend in crude has been extremely consistent. Since the April 21 low, we have only seen one or two instances of oil falling for two days in a row. And even then, the price drop barely registered. The rate of increase has slowed over the past week, but this was inevitable for three reasons.
First, if we didn’t slow, oil would crest $100 come Christmas, and that’s entirely unrealistic. Second, we just filled the March 9 overnight gap that sparked the worst part of the crash. Technical analysis 101 says gaps, once filled, tend to become resistance. Third, $40 was a major support zone throughout the past three years. The principle of polarity reminds us that old floors often become new ceilings.
So what’s the oil action mean for Marathon? For now, it’s supportive of MRO stock’s uptrend. But if we start to see heavier selling come into play, it could spell a deeper pullback in oil stocks.
Embrace the Pullback in MRO Stock
The speculative fervor jamming oil-related equities higher last week was a sight to behold. Small-caps and beaten-down tickers in industries like airlines and restaurants saw massive capital inflows. Over two sessions, MRO skyrocketed 35%. I don’t think it should be surprising that the rally came after the stock cleared a critical resistance level at $6.25.
For five weeks, that level held firm, rejecting countless breakout attempts. Its long-awaited failure brought buyers to the yard. For two consecutive sessions over 65 million shares traded, signifying powerful accumulation.
Perhaps this goes without saying, but the momentum of Marathon’s uptrend increased during the advance. With that much sizzle behind the move, it’s really hard not to view the next pullback as a buying opportunity. There’s always the chance that the 35% gain fizzles fast and we return below the breakout area, but I wouldn’t bet on it. Instead, this pullback provides a second opportunity to snatch-up MRO stock or enter bullish options trades.
A High Odds Options Trade
With the stock closing at its lows on Wednesday, it’s worth waiting for evidence that bulls emerge before pulling the trigger. The two-day retreat could easily become a three- or four-day drop and still qualify as a good dip buy. MRO stock is cheap enough to make purchasing the stock easy. But if you’re looking to increase your odds of success, selling puts is worth considering.
The Trade: Sell the July $6 put for around 36 cents.
Because of the extremely low stock price, the margin requirement for naked puts is dirt cheap. It varies from broker to broker, but my platform pegs the initial collateral near $60. That makes the potential return on initial investment over 50%, which is fantastic for this type of trade.
You’ll capture the max gain of $36 per contract if MRO stock sits above $6 at expiration. Otherwise, you’re obligated to buy the stock at a basis of $5.64.
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