Thursday, October 18, 2007

Oil Stocks Vs. Crude Oil Trading Above $90

As crude oil continues to go higher and higher, the debate about the price of oil helping energy related stocks earnings is balanced out by the concern that the price of oil will stall global economies. One method to gauge the strength in individual oil companies is to analyze the relationship between their price and volume. One way to do this is to take the daily pivot and look for where this pivot is in relation to the entire trading range of the day. A pivot in the higher third of the day, would signify a positive day, since the stock did trade lower, but rallied to finish above its midpoint. The next step would be to compare volume.

One formula that seems to keep things simple and make sense is to take this pivot number( ((High + Low + Close)/3) ) and subtract the daily midpoint( (H+L)/2) ). Then multiply this number by the volume for the day. A positive day with a pivot above the midpoint, with strong volume, would have greater weight compared to a negative day with low volume. The next step would be to add a moving average to smooth the data.

The spreadsheet below shows a custom basket of oil stocks. The column market M1 is the value described above. The next column is the value of M1 five days prior. The column market DiffM1 is the change in M1 over the past week.

This is the same basket of stocks with data from October 18th.

There are two features to watch with the M1 indicator. The first is if the value is greater or lesser than zero. Finding stocks that are shifting from negative values to positive, usually are worth owning. The second feature is to watch for divergence in price and value of the indicator. If the price is making new highs, and the indicator is falling, it means it is time to have tighter stops. Below are some stocks from the first list above. The first three have strong DiffM1, while the second two have weaker values of DiffM1.

SNP - China Petro & Chem

HES - Hess Corp.

XOM - Exxon Mobil

VLO - Valero Energy

NOV - National Oilwell Varco

Telechart 2007 is probably the easiest software to set up scans to filter data. They offer a 30day free trial for their $29.99 monthly service. The software they office is free, the user only pays for the data feed. It is well worth the free trial. If anyone wants some of the scans and formulas I use, email me with the button just below the Fed Funds Rate poll on the upper right. I can email you formulas and they are easy to cut and paste.

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