The price of oil took another hard hit on Tuesday, closing the day down by about 7%. This brings the slide of the NYMEX futures contract from the early October highs do yesterday’s close to nearly 30%…all in a matter of weeks. In the near-term this move increasingly looks to be overdone and I am looking for stocks in the energy space, such as Schlumberger (NYSE:SLB) for buying opportunities into year-end.
Before we look at the below two charts, allow me to be clear. Just because a stock has gone on sale and in the case of SLB stock has dropped 40% from the 2018 highs does not make it a buy. Furthermore, trying to catch a falling knife can be an ill-advised strategy. However, given the following points and charts, I do think reward to risk is increasingly favorable for a bounce in HAL stock (and in the price of oil for that matter), at least through the lens of legging into a long position (i.e. not going all in).
SLB Stock Charts
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Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
From a timing perspective, the early-to-mid-November period tends see buyers come into the stock market for a year-end rally. While this does not have to happen each year, the odds are high. Underperforming fund managers at some point must chase performance, causing a bid in the market. The recent broad market weakness has begun to bake in a variety of concerns, which has brought multiples down and may further fuel the performance-chasing decision for fund managers.
For shares of Schlumberger, it has been a rough going this year. With the most recent weakness, the stock is now back to levels last seen in 2009. Much of the recent drop, of course, was due to the stock’s positive correlation to the price of oil, which I also increasingly see to be overdone on the downside for the near-term.
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Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that SLB stock since about the July period of this year has continuously found resistance at its yellow 50-day simple moving average. The most recent steep multiweek drop has now, however, pushed the SLB stock well below this moving average while the MACD momentum oscillator in black at the bottom of the chart is in deep oversold territory. A mean-reversion bounce higher in the stock is increasingly likely.
Active investors and traders could look to initiate small long positions around the low $47 area with a first upside target near $52. If a bounce does not occur by late November then a time stop can be applied. In the event of a sharp bullish reversal on a weekly closing basis one could add to this initial long position for a price target in the $55-$57 area.
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