Why You Should Buy This Company No One is Paying Attention To
Despite the negative sentiment still surrounding crude oil and energy stocks, the evidence points to a much brighter future. Every day my screens turn up more and more energy stocks forming bottoms and actually breaking out to the upside.
It started with explorers and producers and spread to drillers. Now I see other oil services stocks making some bullish noise, including deep-water engineering services provider Oceaneering International (NYSE: OII).
Any company involved with offshore drilling for oil and gas suffered last year as crude prices plummeted. Rigs were shut down, global stores seemed to be overflowing and business slowed to a crawl. But as we see time and time again, the charts firm up and start to rise long before the fundamentals seems to change.
The market, being the sum of the actions of all investors, commercial operators and speculators, looks out into the future to anticipate what might happen roughly nine months down the road. Right now, it suspects that oil demand will pick up by year end and all that reduced capacity will create bottlenecks.
Getting back to my mandate, the charts of many oil services stocks are starting to look rather nice. In particular, OII is challenging strong resistance at $ 56.50 after trading sideways all year.
The sideways trading formed a nice base that allowed the stock to heal as bulls and bears reworked their strategies. Everyone seemed to be waiting for a spark to the next directional move, and they may have gotten it Monday when crude oil surged 6% on the day.
OII broke out from the loose double-bottom, or “W” pattern, that formed the bulk of the base. Lows in February and March created a potential lasting price floor, and when prices moved above the center peak of the “W,” the bulls took control.
Normally, that would be enough to make me declare victory for the bulls, but resistance just above at $ 56.50, as mentioned, looms large. However, there are other technical factors that suggest the odds for higher prices are good.
First, momentum indicators such as the Relative Strength Index (RSI) have been rising for months even as prices continued to set lower lows. This is called a bullish divergence between price and indicator, and it is usually price that changes course. Indeed, RSI has already moved into a region that suggests strong upside power as prices started to set higher highs.
Next, cumulative volume, which keeps a running tally of volume on up days minus volume on down days, has been rising too. It is already at its highest level since last summer when prices were near $ 70, compared to the current mid-$ 50s. This is a proxy for money flowing into the stock and suggests demand for shares is now able to soak up all the supply offered for sale.
Finally, OII has moved above its key 50-day moving average, which itself has started to curl higher. This is another good sign even though the larger 200-day average is still above in the low $ 60s. Even if the stock is unable to penetrate the 200-day average, just rising to meet it could result in a double-digit profit in just a few weeks.
Again, sentiment in the energy sector is still rather bearish, and the household name “big oil” stocks are still languishing. But the smaller oil services names have started to move. Now is the time to nibble before everyone else sees what is happening and the momentum-chasing crowd gets active.
Recommended Trade Setup:
— Buy OII at $ 56.50
— Set stop-loss at $ 53.50
— Set initial price target at $ 64 for a potential 13% gain in four weeks
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