Last week saw a much-needed rebound in the energy sector. Spurred by a surge in crude oil, Exxon Mobil (NYSE:XOM) jumped 5.3% for its best weekly gain since June 1. Bulls are pointing to the awakening as a sign that a bottom has finally been found in XOM stock. Meanwhile, bears are pointing to the mountain of overhead supply as a reason to stick with their pessimistic posture.
Overall, both stances have merit. And while I still favor the short side, I’d be lying if I said last week’s strength didn’t intrigue me. Any time a stock cobbles together its best week in four months, it warrants further investigation. If nothing else, it could mean the easy money for Exxon’s current bear phase is ending.
On a side note, bottom fishers had a lot of success during the post-March rebound if they took profits into strength. Thus, I wouldn’t be surprised if the current oversold conditions gave way to a similar recovery. The trick lies in deciding when we have enough evidence that buyers are returning to justify casting a line.
With all of that in mind, let’s examine both the bull and bear case for XOM stock.
The XOM Stock Bear Case
We’re starting with the easier of the two arguments. It takes zero courage to hate on the energy sector. The crowd loathes the space, and has been bailing from seemingly everything connected to oil for years now. The exodus accelerated during the novel coronavirus scare — and even though the rest of the market has largely recovered, Exxon Mobil and friends have not.
There’s no need to even delve into the earnings deterioration or beat-down happening to the balance sheet. The price trend tells you everything you need to know about how the Street views Exxon’s prospects. Ever since the downtrend began anew in August with a break of the pivotal $41 support zone, sellers have been in complete control.
The daily view above shows falling 200-day, 50-day and 20-day moving averages. Last week’s pop did nothing to change that. Not yet, at least. But if you think this rally will follow in the footsteps of its predecessors, then this should be a good opportunity to deploy bearish trades. To increase your odds of success, use put diagonal spreads like the following:
Bear Trade Idea: Buy the Dec. $37.50 put while selling the Nov. $32.50 put for a net debit of $3.30.
A drop toward $33 and low will yield $100 to $200 per contract.
The Bull Case
Buyers have three developments weighing in their favor.
First, a slight bullish divergence has formed in the RSI indicator. Plus, we saw a sharp enough rise in the momentum indicator to reverse its downtrend finally. Both measures point to this retracement being the strongest in months.
Second, price ran enough last week to create an equal pivot high, officially ending the series of lower swing highs that was in place. While a higher pivot high would have been even better, the fact that buyers could jam prices back to old resistance is a victory.
Third, Exxon Mobil’s dividend yield is now in the double digits. You better believe it’s high enough to make everyone do a double-take and wonder if it’s worth trying to catch the falling knife. And if enough income seekers swarm to soak up supply, we could see a bottom form.
If you want more confirmation, you could wait for a break above Friday’s high ($35.95). That will mark the first break of resistance since the downtrend began in earnest four months ago. As an alternative to buying shares, you could sell puts.
Bull Trade Idea: Sell the Nov. $32.50 puts for $1.25.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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