Let’s Take Profits in an Unloved Sector

Talk about waffling!

Even though oil basically meandered over the past few weeks, it still managed to notch its ninth weekly gain in a row. The underlying stories about oil prices aren’t any different than they’ve been for weeks.

The biggest story is the glut in the amount of global supply, while a secondary concern is that the net number of rigs taken offline has now exceeded those put into service for the last 23 weeks in a row…

…and some weeks, that appears to be welcome news.

My “line in the sand of support” sits at $58 a barrel. So long as it holds there I will continue to anticipate prices eventually going higher.

All of which brings me to this post-Memorial Day case study rooted in the oil patch.

You see, when I get a buy signal in one of my analysis tools or the other, that’s all well and good, but when I get a signal on a stock across multiple signals, I tend to favor these, as they have the “stacking” effect that I love.

Stacking is when you get confirmation from several technical, fundamental, or seasonal signals.

And for today’s highlighted case study, well, we got all three…

I just love Occidental Petroleum Corporation (NYSE:OXY). I’ll start with this chart to give you a sneak peak on why OXY is lighting up my screens:

Click to Enlarge
As I said before, I love it when a stock “stacks” up across my key technical signals. And OXY is a “stacking” giant across these three metrics:

Technical – OXY is both showing longer term sideways to upward channels on the chart above. Note that there is a shorter term downward channel, but this is typically a pullback offering a better entry price when coupled with longer term channels, such as the ones we see.

Fundamental – Like I mentioned above, energy is not the strongest sector in the group, but it has been the strongest for the quarter. Since March, energy has been on a tear, with oil leading the way. OXY is getting the benefit of being in the right sector at the right time.

Seasonal – Ever heard of my Money Calendar? It’s a seasonal stock picker that uses 10 years and nearly 400 million bits of data to decode what stocks have the highest probability of moving higher. It also tells me the exact buy and sell dates to be long (or short) in a stock. I utilize this on the top 250 stocks and ETFs, and this week it’s telling me that OXY is one of the best.

Let’s take a closer look…

The chart below represents the last 10 years in which OXY traded, specifically between May 26 and June 13. Nine of those last 10 years would have been profitable had you bought OXY on May 26 and sold on June 13. The average move during this time frame was just less than $5.

So what I am looking for is a $4 to $5 gain on OXY between now and June 13.

If you add the Money Calendar (MC) Avg. Profit to its recent closing price of $77 per share, our target price is $82. Therefore, buying the stock at $77 and selling it three weeks later at $82 nets a $5 per share profit, or a Return on Investment of 6%.

Of course my question is always “Can we do better?”

With Options, we can.

Right now, OXY options are not just cheap in price, but, historically, cheap in premium. In fact, I believe we can buy OXY call options “On Sale.”

How? A call option grants the buyer the right to purchase stock for a set price up to a set time in the future. Now I don’t want to own the stock, I want to rent it for three weeks and then sell the “rental contract” to someone else for a higher price.

Here’s an example of what I am looking at for OXY based on the information provided by my charts and signals:

Click to Enlarge
This call option grants me the right to buy OXY at $75 a share between now and June 19. The cost of this option is $250 for one contract. Remember, one contract is good for 100 shares of stock, but my plan is to sell this option if OXY moves higher, preferably to $82.

Now let’s look at the risk graph below to bolster our case:

A picture is worth a thousand words… or about $500, if we are right and OXY moves to our $82-per-share target.

On the other side, if OXY drops, the most that we could stand to lose would be the amount we paid for the call options, in this case $250.

With that kind of reward to risk ratio, it’s time to drill for crude.

Until next time,

Tom Gentile

Tom Gentile

America’s #1 Trader

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