Seasonal strength in crude oil typically begins in February, and any pullbacks in the popular energy sector ETF or big oil stocks could represent good buying opportunities.
As of Thursday’s close, the April crude oil contract is down over $3 for the week. Often, the price of crude oil leads the stock market, but this has not been the case recently, as crude peaked in early January and has been declining while stocks have remained strong.
From a seasonal perspective, crude oil typically bottoms in February, and therefore, any further declines should be watched closely.
The current technical action of the popular Select Sector SPDR - Energy (XLE) is not impressive, but there is one $40 billion oil and gas exploration company that should be a great buy if crude oil corrects further.
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Chart Analysis: The weekly chart of the continuous crude oil contract (updated through Feb. 2) shows that crude may close the week at its lowest level in six weeks. The upside target from the double-bottom formation at $105.33 has not yet been achieved, as the recent high has been $103.74.
- There is next good support on the weekly chart in the $92.50-$92.75 area ($93.24 basis April), which corresponds to the December lows and the 38.2% Fibonacci retracement support level
- The 50% Fibonacci retracement level is at $89.44
- Volume has increased while prices have drifted lower. The on-balance volume (OBV) dropped below its weighted moving average (WMA) and the uptrend, line d, in mid-January
- This was the support from the bullish divergence at the October lows, which was confirmed when resistance (line c) was overcome
- Initial resistance for the April contract is at $98.75 with stronger resistance in the $100 area. A daily close above $102 would signal a resumption of the uptrend
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The Select Sector SPDR - Energy (XLE) appears to be forming a reverse head-and-shoulders (H&S) bottom formation, but the neckline (line a) is well above current levels at $78.
- So far, XLE has been unable to surpass the resistance at $73.19 (line b), which was the late-October high
- While prices have formed higher highs (line a), the relative performance, or RS analysis, has formed lower highs (line c)
- It is also a sign of weakness that the RS has formed lower lows, line d
- The volume pattern is consistent with a reverse H&S bottom formation, but the OBV is still in a downtrend, line e, and is just barely above its weighted moving average
- Weekly OBV (not shown) looks more positive
- There is next good support for XLE in the $68.50-$69.50 area with major support at $64.80
Anadarko Petroleum Corp. (APC) is a $40 billion oil and gas exploration company that has traded in a fairly tight range between $77.60 and $82.47 over the past six weeks. It looks ready to close this week above last week’s high at $81.69, which would be quite positive.
- A close above long-term resistance at $85.25-$85.50 (line f) has an initial Fibonacci price projection target at $94 with further targets near the $100 area
- The RS analysis has broken its downtrend, line e, suggesting that APC is ready to outperform the S&P 500
- Weekly OBV broke out to new highs in October, as it was stronger than prices. It has now moved back above its weighted moving average and is well above support at line i
- Daily OBV has formed higher highs over the past four months
- There is initial support now at $80.70 with stronger support at $79.50
What It Means: If the economy continues to be stronger than most economists think, then a drop in crude oil prices and a pullback in oil stocks should present a good buying opportunity.
In the first quarter of 2011, the Select Sector SPDR - Energy (XLE) was up by 16.8% (see complete sector performance chart here). Therefore, I will be watching it closely on a correction. I expect some oil stocks including Anadarko Petroleum Corp. (APC) to hold up better than XLE.
The monthly jobs report released this morning was much stronger than expected, and stocks as well as crude oil are both sharply higher in early trading.
How to Profit: For Anadarko Petroleum Corp. (APC), go 50% long at $80.88 and 50% long at $79.78 with a stop at $75.74. On a move above $85.50, raise the stop to $79.70.
