I am becoming bullish on energy stocks, in particular CVX.
First my technical rationale:
From a fundamental perspective:
I see two stages to this opportunity. In the shorter term, I expect a return to the highs of the trailing one month range. For this, my stop loss will be a closing violation of the ascending channel, while my PT is 164. On a longer time scale I see CVX return above 170, though that might not happen before the earnings release in early November.
First my technical rationale:
- CVX has consilidated over the past 3+ months in an unusually tight range. On Friday, the stock ended exactly on the POC for the trailing 3 months.
- Despite a number of headwinds (see below) CVX remains in the context of an uptrend.
- CVX and XLE (the ETF it is most closely correlated to) have under-performed the broader market over the longer term, but have shows strength more recently, pointing to the possibility of favorable sector rotation.
- None of the three downward thrusts that occurred over the past month have uncovered significant supply at lower prices
- A rise above 164 would present an entry on the double/triple bottom pattern that emerged over the past month, suggesting further potential towards 171+.
From a fundamental perspective:
- Crude oil futures remained quite resilient despite the ongoing dollar strength over the past number of weeks, along with widely reported economic weakness reported out of China.
- US rig counts have peaked late last year and started to decline significantly over the past six months. This should provide further support for oil prices.
- Year-on-year realized price comparisons were very challenging during the first half of the year, but that headwind looks set to die down.
- CVX is a high quality stock, with a rare, perfect Piotroski Score of 9, a substantial dividend, trading at a reasonable 11.3x 2024 EPS. Given all the macro uncertainty, this should help maintain demand for the stock.
I see two stages to this opportunity. In the shorter term, I expect a return to the highs of the trailing one month range. For this, my stop loss will be a closing violation of the ascending channel, while my PT is 164. On a longer time scale I see CVX return above 170, though that might not happen before the earnings release in early November.
Trade active:
Long at 160.27
Comment:
I mentioned in the original idea that a rise above 164 would activate a double or triple bottom. This has now happened.
Per the HPP indicator, this pattern has an 80% win probability and a profit factor of 15+ on the CVX 65 minute bars. I am taking profits on 1/3 of the position. On the remainder I raise the SL to the entry and the T1 to 168.63, which is the T1 for the double bottom pattern.
Comment:
I hedged my remaining CVX position with a put spread on XLE. As I look at today's huge under-performance of small caps (IJR -3.0% vs. SPY -0.4%) I have a feeling that this weakness will spread to large caps tomorrow, renewing recession fears, and sending oil down. Today's strength of oil seemed related to the announcement by Russia and Saudi Arabia of extended production cuts. I am always skeptical of news-driven moves, and more so when the news originates from countries that have poor records on transparency and governance.
Comment:
I took off the XLE hedge, as it was starting to eat too much into the profit of the CVX position. I am keeping that piece for now.
Trade closed manually:
It's been over a month and this one never really went anywhere. I'm closing it out for a fairly nominal gain.