An Oil Trade That Could Make You 24% In 8 Weeks
Contrarian investing means going against the crowd, and nowhere in the market today is there a crowd bigger than the oil and energy stock naysayers. With West Texas Intermediate (WTI) crude oil trading around $50 per barrel, there are headlines almost daily forecasting prices moving into the $30s and even $20s.
With oil prices down more than 50% from their highs last summer, energy stocks severely lagged the broader market for the better part of the past year. It seems no one is interested in them anymore, but this is the time when contrarian ears perk up.
#-ad_banner-#In the early stages of a recovery from a bear market, not every group, even within a single sector, looks healthy enough to rally. However, oil services stocks have shown resilience over the past few weeks and some are even starting to move above resistance levels.
Despite the daily news of a global supply gut, the shutting down of oil rigs as crude prices tumbled seems to be a recipe for a big bottleneck in supply one day. And even though global economies are still sputtering, they are improving, and with them, demand for energy.
We are currently seeing what may be an important bottoming formation in the benchmark PHLX Oil Service Sector Index (OSX).
As we can see in the chart, the decline seems to have halted at the 61.8% retracement level of the 2008-2014 bull market. This Fibonacci ratio is often a place where traders look for changes in trend. While not statistically reliable enough to use as a solo trading tool, it is useful when combined with other indicators. In this case, it tells us that if OSX is going to rebound this is a likely place to do it, as long as other indicators agree.
At current prices, the index has held support going back to 2011 and 2012. It also sports a bullish divergence with the Relative Strength Index (RSI). When this momentum indicator rises while prices set equal or lower lows, it is price that typically changes direction.
One stock in the sector that is poised to break out to the upside is contract oil and gas driller Helmerich & Payne (NYSE: HP).
There are several positive technical developments that make this stock stand out among its peers.
For starters, it has been trading sideways for the past several months to form a base. This allows both bulls and bears to rethink their positions while the stock heals after a long decline. In March, prices moved above the trendline from last year’s peak. The stock has now paused in a very tight range at the upper border of the base.
Stochastics, which is a good momentum indicator for trading ranges, is holding on at high levels. This tells us the stock is closing near the top of its daily range, which is a bullish sign that traders are willing to take positions home overnight.
HP is also holding above its 50-day moving average, which has started to curl higher. Finally, in January, prices hit the long-term trendline from the 2008 low and bounced sharply.
Taken together, this provides a rather solid setup for the bulls. Resistance at the top of the base is at $71.90, so a breakout above that level would be required to trigger this trade. Should it trigger, we can project the height of the base up from that level to find a first price target. In this case, it would be roughly $89, which also coincides with a resistance level going back to October and November.
For a little icing on the cake, HP offers a fat 4% dividend yield.
Of course, fallout from a deal, or lack of a deal, with Iran to limit the country’s nuclear program could change things, but we can only operate with the information now available. If the market has already discounted this, then all we have to do is read what is already on the charts — and that is looking quite bullish.
Recommended Trade Setup:
— Buy HP at $71.90
— Set stop-loss at $67.50
— Set initial price target at $89 for a potential 24% gain in eight weeks
Amplify Your Gains: Generate 238% From a 24% Stock Move
Using options, we can amplify HP’s potential 24% move into a 238% gain. Specifically, I recommend buying HP June 65 Calls for $7.10 or less.
This call option has a delta of 68, which means it will move roughly $0.68 for every dollar that HP moves, but it costs a fraction of the price of the stock.
The trade breaks even at $72.10 ($65 strike price plus $7.10 options premium), which is 4.2% above current prices.
If HP hits Michael’s upside target of $89, then the call options will be worth at least $24 ($89 target minus $65 strike price). Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price.
Profit Amplifying Trade Setup:
— Buy HP June 65 Calls at $7.10 or less
If you’re interested in learning more about options or receiving my top trades directly in your inbox, click here.
In the six weeks since I started sending my recommendations to a small group of traders, we’ve already closed a 90.5% winner and are up 45.7% and 12% on two other holdings. To get started today, follow this link.
This article was originally published on ProfitableTrading.com: Beaten-Down Stock Just a Few Dollars Away From a Buy Signal