Oil bulls finally received their comeuppance on Thursday. The steep decline marks the end of the glorious and consistent uptrend that brought big gains to energy stocks. With the backbone of the daily trend now broken, oil is likely to enter a more volatile phase. Rallies are suspect and broken support is now liable to become resistance.
Students of history shouldn’t be all that surprised, though. Oil’s past is riddled with chop. Uptrends always give way to trading ranges eventually. And that, I suspect, is the most likely outcome moving forward.
Still, it doesn’t mean energy stocks are dead. Most still boast compelling uptrends, despite yesterday’s oil rout. And, even if crude ping pongs around $60, it will provide a tailwind to the earnings potential of energy companies that were grappling with single-digit oil prices just one year ago.
If you’re looking to buy the dip in the sector, here are my favorite three tickers symbols to consider:
After a brief review of their charts, I’ll share which options trade is catching my eye.
Energy Stocks: Energy Sector (XLE)
The simplest route for gaming the dip is to buy the entire energy sector. You get instant diversification and avoid any company-specific news that might cause your bet to diverge from the rest of the sector. There’s nothing worse than seeing the overall sector rise as expected, but your individual stock bet trades lower because of some unforeseen news.
In this case, we’re betting on the energy sector through XLE. It counts the usual suspects among its top holdings and has a chart worth chasing. Its recent tumble saw the fund break its 20-day moving average, suggesting this could be a deeper retreat. But we’ve seen two previous episodes that breached the 20-day without upending the overall uptrend. I’m betting on this one being similar.
Because the rate of ascent may slow due to oil prices cooling, I like building a higher-probability cash flow trade over a directional one.
The Trade: Sell the April $46 put for $1.05.
Exxon Mobil (XOM)
Exxon Mobil provides a second option that should prove valuable to income seekers. Despite more than doubling off the lows, the oil giant still offers a dividend yield north of 6%. If its trajectory shifts sideways, you’ll collect a fair bit of income while waiting. From a charting perspective, its 50-day and 200-day moving averages have both turned higher to reflect buyers now control the intermediate and long-term trends.
While this week’s pullback was deeper than some would like, I think it provides an attractive entry for those unwilling to buy into the sky earlier in the month.
Instead of buying XOM stock outright, how about getting paid for your willingness to purchase? You can do so by selling puts.
The Trade: Sell the April $55 put for $1.70.
Transocean (RIG)
The final of our energy stocks to shop is Transocean. RIG stock provides a cheaper, more speculative alternative to both XLE and XOM. At just under $4, it’s cheap enough for small traders to play. It also boasts a higher beta for those looking for something more exciting than the likes of Exxon Mobil.
Since its uptrend began last November, you’ll note that retracements between the 50-day and 20-day moving average have proven buying opportunities. I view the current dip as no different. To signal the pullback has terminated and the next leg begun, wait for a push above the prior day’s high as a trigger. Based on Friday’s bar, I’m eyeing $4 as the line that needs to be crossed before entering new bull plays.
The Trade: Sell the April $3.50 put for around 25 cents.
On the date of publication, Tyler Craig held LONG positions in XLE.
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