The unraveling of commodity prices is well underway. Crude oil, for instance, dropped 27% from the peak reached after Russia invaded Ukraine. The decline pulled prices to the 200-day moving average, resulting in the first test of the long-term indicator for 2022. Flagging oil prices is taking a severe toll on the energy sector, and it’s catching down to the rest of the market. Given the continued deterioration, I’m finding many energy stocks to sell.
Their price trends have turned bearish, and significant support zones are giving way. If you find sinking commodity prices in a time of sky-high inflation readings perplexing, you’re not alone. But with the U.S. dollar screaming to a 20-year high and an inevitable downturn bearing down on us, traders have begun to pull the plug on long commodity bets.
While there’s always a chance that oil prices stabilize and energy stocks do likewise, the threat of a recession makes rallies suspect for now. Here are three of the worst-looking energy stocks to sell before they fall further.
Energy Stocks: Schlumberger (SLB)
The reversal of fortune for Schlumberger (NYSE:SLB) has been swift. What took half a year to build has been wiped out in a single month, and now, SLB is nearly back to unchanged for 2022.
Since there are so many battered charts in the energy sector, I focused on those that had fallen the furthest or broke the most significant support levels. In other words, those with the most relative weakness made the cut. SLB stock was one of them. It’s now 35% off the highs and trending lower beneath all major moving averages on the daily chart.
Worse yet, it’s one of the few oil tickers that cracked the 200 weekly moving average. The next support level isn’t until $28, leaving $4 of easy downside if the trend continues. Consider selling the stock and revisiting once a new uptrend takes root. If you want to profit from the pain, then buy put spreads.
The Trade: Buy the September $32.50/$27.50 put spread for $1.90.
NOV Inc. (NOV)
NOV Inc. (NYSE:NOV), formerly National Oilwell Varco, offers another nasty chart for bears to play. Its post-pandemic recovery struggled to turn its long-term downtrend around, and with a freshly completed double top pattern on the weekly time frame, it’s definitely one of the top picks for energy stocks to sell.
Like SLB, the daily trend is now below all major moving averages, and we just broke another support level on Tuesday. If the weak technicals weren’t enough, the earnings trajectory doesn’t appear near as robust as the rest of the sector.
Given the boom in oil prices this year, most companies have seen their revenue and earnings surge. By contrast, NOV Inc hasn’t turned a quarterly profit in nearly three years. That leaves it vulnerable to more downside if the tide continues to go out for energy. Sell the stock, or purchase an options spread.
The Trade: Buy the November $15/$11 put spread for $1.50.
Marathon Oil (MRO)
Marathon Oil (NYSE:MRO) shares are nearly 40% off the highs but still have a long way to go if investors want to unravel its ascent. Prices increased 11-fold from the pandemic low of $3 and still sit over $20. With the recent thrashing, MRO stock has fallen below its 200-day moving average for the first time since bottoming in 2020. The severity of the decline has left loads of resistance overhead that should keep a lid on future rallies.
While prices are oversold in the short run and could potentially snap back, the rebound will be short-lived. For now, the path of least resistance is lower, making MRO another top energy stock to sell. Once again, put spreads are my play of choice.
The Trade: Buy the September $21/$17 for $1.45.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.