This Once-Mighty Stock Could Plunge In The Next Few Weeks
WARNING: A Major Correction Could Begin This Week
A trading prodigy is predicting the biggest stock market correction since 2008.
In short, an important market event will take place on Wednesday that could trigger a freefall in stocks.
He’s been tracking this situation for months. I urge you to take a few seconds to listen to what he has to say. If he’s right, the information he’s going to share could help you save your portfolio and even make money in the coming correction. Click here to find out how to prepare yourself now.
It takes a lot to turn a bear market around, but for oil services stocks it seemed that the requirements for such a move were starting to gel in May.
The PHLX Oil Service Sector Index (OSX) had just made a tentative breakout from a bottoming pattern that was a cross between a double-bottom and an inverted head-and-shoulders. It even moved above its 50-day moving average, which itself was rising.
Paradoxically, OSX ran out of fuel shortly thereafter. Momentum dried up and money started to flow back out of the sector once again. It took a while, but its slow fade finally negated any form of a breakout in early June by dipping back under its 50-day moving average and former breakout levels.
What is worse is that as oil stocks started to decline, so too did industrial metals, paper stocks and chemicals. Almost all forms of basic materials and sectors that operate at the raw materials level of the economy are hurting.
I’ll leave it to the economists to debate the “D” word — deflation. Uncertainty in Greece did not help, as demand for energy fell in a weakening Europe.
Baker Hughes (NYSE: BHI) was one of the stronger oil services stocks in the first four months of the year, rallying 26% and actually scoring and following through on a solid upside breakout in March. However, the party ended on May 5 with a significant technical reversal to the downside on no particular news. The stock could no longer fight the misfortunes of its peers.
As June opened, the bears had wrested full control. The stock is now down 15% from its May peak above $70. On Thursday, shares dropped sharply, slicing below their 200-day moving average.
The once-mighty BHI had fallen and — unlike many of its peers, which are already trading at low levels — it has a lot of room on the downside before encountering serious support.
Further, its trailing price-to-earnings (P/E) ratio of 33 is still well above its sector average. Even worse, based on earnings estimates for next year, its forward P/E ratio is above 50. With oil prices falling and dwindling rig counts, it seems that the “P” is going to adjust down to the “E” and not the other way around.
Support exists at the conjunction of the rising trendline from the 2008 bottom and a horizontal zone defined by several highs and lows over the past few years at $51 to $52. And that includes a gap and retracement seen in late 2013.
The bigger they come, the harder they fall — and Baker Hughes was one of the biggest performers in the sector this year. It now has the most to lose in an already weak group.
Recommended Trade Setup:
— Sell BHI short at the market price
— Set stop-loss at $63
— Set initial price target at $51.50 for a potential 14% gain in five weeks
Note: Please be aware that shorting comes with potentially unlimited risks. There is another way to make money on falling stocks that has been perfected by my colleague Jared Levy. And it allows traders to amplify their returns. For instance, he took an 11% move in another oil stock and turned it into a 91% profit in 15 days risking just $525. To find out how he does it, follow this link.
What’s more, Jared is predicting an important market event will take place in the next few days, which could result in hundreds of popular stocks falling 10% to 30%. Click here for details.
This article was originally published on ProfitableTrading.com: This Once-Mighty Stock Could Plunge in the Next Few Weeks