Is Crude Ready to Crack or Break Out?

By  MAY 22, 2013 11:05 AM

Technical analysis reveals which stock might benefit if crude oil breaks out above its 2011 top this year.


Stocks were a bit mixed Monday, as the S&P 500 (INDEXSP:.INX), Dow Industrials (INDEXDJX:.DJI), and Dow Transports (INDEXDJX:DJT) closed lower, and the NYSE Composite (INDEXDJX:NYA) was higher. The market internals were much stronger than prices.

As most commodity markets have dropped this year, crude oil has bucked the trend with the July crude oil contract up 3.4%. The combination of high inventories and relatively low demand has some analysts convinced that crude oil prices may be due for a sharp drop.

The bulls apparently are betting on future economic growth to fuel greater demand and as consumers have noted, gas prices have started to rise ahead of the Memorial Day holiday. The technical outlook for crude oil suggests that we are close to a critical juncture and one oil stock looks ready to move even higher.

Chart Analysis: The weekly chart of the continuous crude oil contract shows that it closed last week almost $4 above its lows and just below the resistance from last fall at line b.

The July 2013 crude oil contract did close above its downtrend, line f, on Monday. The next resistance is at $98.22, which was the April 1 high.

A Bullish Sign for One Stock

Schlumberger Ltd. (NYSE:SLB) broke its downtrend, line f, on May 6 and rallied to a high of $77.69. There is next resistance at $79.74.

What it Means: The upside breakout in the July crude oil contract and in the Select Sector SPDR Energy (NYSEARCA:XLE) does favor higher crude and a bullish environment for the energy stocks.

It has been a choppy year so far for crude oil, and this week’s close should clarify the outlook.

I like the technical action in Schlumberger Ltd. but would cancel the order if stronger resistance is hit before our buy levels.

How to Profit: For Schlumberger Ltd., go 50% long at $77.06 and 50% at $76.28 with a stop at $72.94 (risk of 4.8%). Cancel if $79.50 is hit first.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

Below, find some more great investing and trading content from MoneyShow:

Drill and Bill: 2 Paths to High Income

Defensive ETFs Lead Outflows

3 Strategies for Huge Returns

Twitter: @TopProsTopPicks

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.