Drilling for Oil Profits

(from the December 18th, 2013 Seasonal Forecaster newsletter)

I haven't covered oil-related stocks much in recent months, but energy-related and specifically oil stocks are usually staples in both long term investor and short-term active trader portfolios.

XLE, the Energy Select Sector SPDR ETF, has a good seasonal track record over the next 6 months. Over the next 23 weeks, which this year takes us in to late May, XLE has gained an average 8.8% with losses in only 2 of 15 years:

The chart of XLE shows it has been cycling within a well-defined up-trending channel. The Stochastics indicator suggests another cycle low may be forming.

The oil-related stock that caught my attention is Baker Hughes (BHI), a supplier of products and services to the drilling industry. BHI's chart jumped out at me with a big gap-up on strong volume in October after their earnings announcement.

Since then, BHI has been consolidating. It has pulled back to the bottom of the gap, and if it rebounds from here, it will be a textbook case of a stock ‘filling the gap' (which is considered a weeding out of remaining sellers). A Stochastics buy signal is close to forming. %K has fallen below 20, crossed over %D, and according to popular interpretation, a rise back above 20 generates a buy signal. Of course, Stochastics buy signals do not make a reliable standalone trading system. They do confirm that buyers are coming in most days and leave the stock closing near its highs.

Fundamentally, the oil stocks do not paint the best picture right now, but things are improving. Drill rig counts are increasing. Baker Hughes announced better than expected earnings in October. Barclays just raised their price objective to $81.

What is the seasonal track record of BHI? Over the next 19 weeks, BHI has gained an average 19.6%, with gains in a healthy 85% of the years.

There are a few IF's to consider here. Buying BHI stock as a new position or add-to-position can make sense IF BHI begins to rebound on higher volume, and IF the overall market has a bullish tone, and IF it is after today's 2 pm Fed announcement.

A covered call could also work well. Selling a January 55 Call against the stock at the current price, and assuming BHI ends above 55 on January 17th and you let the stock be called away, this covered call could return 5.7%, which is 68.7% annualized.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, including the answer to the above question, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

 

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