Searching Oil Stocks And Scanning For Trading Ideas

Note: All charts and lists can be clicked to enlarge.







This is a partial list of the major stocks in the oil sector. This might be hard to view, so the spreadsheet can be downloaded here. This list is broken down in to basic categories, and it can be organized even further into subgroups, but for this discussion it will suffice. The list has some basic information about the companies as of the market close today. There is endless amounts of fundamental data that can be added for more analysis, but today the focus will stay with scanning this list of stocks for which ones performed well today.

This next list is the same as above, except the data fields are filled with data taken from the trading of the individual companies. It shows the close,moving averages, volume, pivots, changes in volume, and changes between close and pivots.





This list can also be viewed and downloaded here.

This is just an example of all the technical data available. A list can be customized to include just about any indicator, including custom indicators. Once we have the data in an orderly format, we can look through it to see what stands out as something that might be worthy of further investigation. In looking at this list, it might be helpful to scan the information for stocks that closed above their daily pivot today,that had greater than average volume, and whose daily pivot today is greater than the pivot of yesterday.

1.Close > (High+Low+Close)/3
2.Volume >AvgxV20
3.(High+Low+Close)/3 > (High1+Low1+Close1)/3

So in a day in which oil was down, the oil service index was negative, and other energy indexes were negative, there were some positive stocks with some decent looking charts.

The results of this scan produced a list of 11 stocks out of our list of 76.

Baker Hughes Inc.(BHI)
Cimarax Energy Inc.(XEC)
Giant Industries Inc.(GI)
Nabors Industries Inc.(NBR)
Oceaneering International(OII)
Precision Drilling Corp.(PDS)
RPC Inc.(RES)
Suncor Energy(SU)
Tesoro Corp.(TSO)
TGC Industries Inc.(TGE)
Unit Corp(UNT)

Of this list, some of the charts have been moving pretty strong for a while, but a few have just started to poke their heads up with some volume.

Click charts to enlarge.























The next post will deal with creating a simple system to apply to this entire group of oil stocks. If anyone has any thoughts or ideas they want back tested, feel free to use the email button at the top of the blog and share your thoughts.

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This is an updated chart of the S&P 500. It includes the advance decline moving average in the top pane. A 50% re-tracement of the last part of the rally is 1428.82. That should be a good area to watch if this down move continues. The market has made a good move after that China 9% down day a while back. With earnings season starting in full force next week, it should not be a surprise if the market consolidates or sells off some. The key is if it is an orderly sell off or something triggered by an event.

Federal Reserve Minutes and Oil

Today at 2pm the Federal Reserve will release the minutes from its March meeting. This has been an anticipated release, and it should give some needed information to what other thoughts the Fed had at the last meeting. This information should move the market one way or the other, because lately interest rates and their direction, seem to be the topic of interest. The chart above of the S&P500 shows that the rally of late has been on decreasing volume. This is also confirmed by the moving average of the advance/decline line. The market has had a good move off the lows of a few weeks back, and with earnings ahead, there could be some profit taking.



The chart of the Nasdaq Composite is very similar to the S&P500 except that the volume as of late has been increasing. This doesn't mean that there could not be profit taking, but it could be a sign of rotation into technology. Time will tell, and with a heavy dose of earnings over the next few weeks, volatility is a given.



Juniper Networks has made a decent move out of its previous channel. The volume yesterday was pretty strong. Can this move continue into its earnings release,April 23?



Goldman Sachs is an interesting chart. Is it a cup with handle formation or is it just retracing some of its down move? This stock never sits still for long and its hard to bet against Goldman Sachs. It will not take too much volume to make any shorts cover positions if it starts moving again. Hopefully it can come down to a nice level, and a lot of money can be made on the next run up.

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Today oil stopped going down after the news last week that the tensions with Iran were lessening with the release of the British soldiers. As oil came down, the oil stocks held pretty strong. This is because only the current month futures contract of oil came down, the forward contracts were bought. These deals with more futures trading, but the bets that oil is going higher are still there, global demand and hurricane season are on the horizon.







Global Santafe, Dril-Quip, and Ensco International are a few charts that are similar to the OIH index. The do look they are going to go higher.

Monday Baker Hughes(BHI) announced that March rig counts worldwide had gone up 2% compared to March a year ago. This might not seem like much, but the international rig count was up over 10% and the US rig count was 2.2%. Canada's rig count dropped. It is worth digging into the global growth of rigs and that will be a topic for the post tomorrow. It will include some sites for research and how to locate all of this information.

Below are a couple charts that have lagged the sector, but had some nice volume
today.





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A couple things to watch on the macro picture. The dollar index is getting to a point where it could make a move to test a previous low. This could lead to an increased focus on the exchange rates versus various parts of the world and who it is good for and who it isn't. The direction of interest rates is key to this. If the dollar breaks to a new low with any momentum, it might be hard for the market to shrug off the news.

Are P/E Ratios Important?

Lately there has been many analysts talking about how the market is undervalued because the market's P/E ratio is below is historical moving average. This can be seen in the first chart which compares the price to earnings ratio and the price to dividend ratio of the S&P 500. A market is not a buying opportunity just because its P/E ratio is low. There are reasons why the P/E ratio is below its historical trend line, and will continue to stay below that level.

Today, Dow Chemical and Burlington Northern are both in the news. Burlington because it was announced that Warren Buffet has raised his stake in the company to over 10% and Dow Chemical because it is being taken private in an estimated 50+billion dollar leveraged buyout. Do you think these two companies were targeted because they had a low P/E ratio? Revenues in Dow Chemical were 49billion last year and the company earned $3.82 a share, with around 960million shares outstanding. Its average dividend over the past 5 year is 3.4%.

This deal can make sense for many reasons. If you have a lot of cash, and can borrow even more and pay a low interest rate, you can leverage your money to not just invest in certain companies, but buy specific ones entirely. What might make sense today could not be a good deal tomorrow, but if you buy solid companies that have their own steady revenue stream you can make a lot of money. With low rates, the returns on deals like this are in excess of 20% because most of the money is borrowed. Does the fact that these deals are taking place mean that the market is ready for another leg up and the bull market has a green light? Does it mean that capital that might have gone into our bond market is looking to go else where? Are rates going to keep going up, because global demand for goods and services is going to expand even if domestic growth stalls or slows?

The effect of these buyouts can be looked at many ways. The money that is now going into Dow Chemical and other LBO's isn't going to be going into other equities or bonds, but that money is mostly leveraged so that might not be as important. The pension funds and mutual funds that are now selling Dow Chemical into the deal, now have capital that they are going to reinvest in other equities, this should be a plus for the market.

Back to the idea of P/E ratios. Over the past years as companies come out of the S&P 500, new companies are added. Basic materials and energy companies have been the best performers over the past few years and the S&P has increased their weighting in the index. These stocks normally have lower P/E ratios compared to technology stocks or other high fliers of the last bull market that have since faded.

The chart below shows the dollar index and two commodity based stocks;Anadarko Petroleum Corporation and US Steel. Anadarko has a P/E of 4.24 and US Steel 9.19. These stocks have had great runs, and yet their P/E ratios are not anywhere near the average for the S&P 500. The chart below shows the point at which the US Dollar started to decline. As this decline started to get some steam, commodity stocks started to preform better than the market as a whole. At first they might have just been compensated for having a commodity based business and the dollar going down required their hard assets to go up in price, but then China was recognized as a growing economy that was consuming more and more of the world's raw materials to fuel their growth. This has lead to basic material(metals and oil)companies, around the globe, to outperform just about any other sector. This trend doesn't seem to be ending yet, and there should be some growth numbers out on China's economy this week.

Spread Trading In A Choppy Market

This is a chart of the NYSE Composite Index. The top panel shows the adv/decl line moving average, the middle panel is the price, and the bottom is volume. The trend line marked "A" shows that the adv/decl moving average is not confirming the price move, "B". The downward sloping volume over the last two days should also give some caution to the idea of adding new long positions. This decreasing in volume is often the norm on holiday short week; the market will be closed Friday in observance of Good Friday.



This chart of the Nasdaq Composite is similar to that of the NYSE. When the adv/decl momentum lags the price of the market, it means that less and less stocks are carrying the load in the rally. The rally the past couple days because of oil taking a pause in its upwards move and the British hostages being released by Iran, is very suspect. Oil is still over $64 and tensions in the area regarding Iran still exist. That being said, with a holiday shortened week, it won't take much for the market to finish positive again today. It should be interesting to see if the market is up with an hour or so to go in the day, if it can hold the gains.

One strategy to use when the market is giving mixed signals is to look for spread trades. This is where you buy a stock you already like, and then look for a stock in the same sector, often a competitor, and take a short position in that stock. This, when done right, can help keep you in a winner in a choppy market.



This chart shows Juniper Networks and Cisco Systems. The top pane shows the spread(jnpr/csco)between the two stocks. When Juniper is outperforming CSCO, the blue spread line will slope upwards; the spread is increasing. To enter a trade like this, if you liked Juniper when it broke above the upper channel line, you would buy Juniper at that point and then short sell Cisco at the same time. You would stay in the trade as long as the spread was increasing in your favor. Increasing means that Juniper would be stronger than CSCO.

So the people at Cisco think JNPR is over priced? Well they can do the opposite trade. They might feel that JNPR should not be breaking out of that channel. So they would short JNPR and buy CSCO, with the intention that the spread would come back together, and that CSCO can not lag JNPR for long.

Another example is taken from a trade in 2005 between two coal companies, Arch Coal and Massey Energy.



In this trade MEE(Massey Energy) broke down out of a triangle pattern, and a short position was entered. There was a lot of talk at the time that Massey's coal had a high sulfur content and was not as desirable as some of the other sources. It was not an easy short idea on a fundamental basis because there was a big focus on the price of oil, and coal was still being talking about on a regular basis as an abundant alternative. Because of the risk of oil continuing to go up, shorting coal was not a risk free trade. To minimize this risk, a long position was entered in ACI(Arch Coal). This trade worked on both the long and the short side. This is not the usual case in a spread trade. The short trade on Massey energy was a +12pt winner, and the long trade on Arch Coal was a +7pt winner. In most cases the hedge side of the trade takes away from some of the profit.

An all time favorite spread to watch is between Goldman Sachs and Morgan Stanley. A short time after Goldman Sachs become public, there were stories that people at Goldman Sachs had shorted Morgan Stanley stock because the stock they owned in their own company was locked up; they could not sell for a certain period of time. Whether this story was true or not, it made for fun in watching the two stocks. With John Mack back at Morgan Stanley the stock has done well, but Goldman Sachs is still the leader. I still wonder if they short each other's stock. Maybe that explains why GS outperforms in the spread?





This chart is of the S&P 500 and the XLB(materials spdr). The top pane shows the spread between the two, along with a linear regression indicator of the spread. As long as this linear regression indicator is sloping upward, XLB is outperforming the S&P 500. This can be used to create a spread trade with either the tracking stocks of each index or through options. Spread trades can be expensive to carry, because there are two sides to each trade. It is not like owning one position, it requires more capital, so options can be an alternative at times.

When the XLB is outperforming, it is also a time to look into the material stocks to see which ones are leading that subindex. A few metal stocks did well on Wednesday.







Coal sector had a good volume day:





Some Triangle Patterns:











This looks like the stock that is carrying the heavy load in the DOW 30.

Screening for Winners From the First Quarter

Now that the first quarter of the year is over and done with, it is a good time to take a look back and see what stocks were breaking into new ground. One way to do this is to scan for stocks that are greater than $5 and were up at least "X%" over the past 66 days. As a simple example this scan will look for stocks that currently show an advance of greater that 20% since January 1,2007. A list of the 600 or so stocks that met this criteria can be viewed or downloaded at http://www.sendmefile.com/00519758

With this list of stocks that performed well, we can then refine the search some more. One filter that is helpful is to eliminate stocks that do not have an average daily volume of at least 75,000 shares. In addition to making sure there is sufficient volume traded in the stocks we are looking at, this also eliminates about 1/3 of our original list. http://www.sendmefile.com/00519772



Research Frontiers Inc.(REFR) is one of the stocks that was in the list filtered for volume. Since the stocks in our list are already up for the year more than 20%, it is important to look for charts that are in a consolidation pattern. REFR has formed a nice triangle pattern. This is one of the better patterns to scan for. The scan formula can be tricky, but it is worth the time in creating a good one. These patterns are some of the best to trade. When applying a couple simple formulas, triangle patterns can give you defined target areas as well as great stop loss areas to trade from.



Bolt Technology Corporation(BTJ)is another stock from the list. Its chart pattern is like many of the stocks in the oil industry. This is a nice example of a triangle pattern. A triangle pattern is basically a series of higher lows combined with a series of lower highs. The price contracts until one side has to break, and the stock breaks out of the triangle. There are four kinds of basic triangles.

1.Symmetrical
2.Ascending(higher lows against a fixed resistance area)
3.Descending(Lower highs against a fixed support level)
4.Expanding(Higher highs and lower lows)

In writing a scan or filter for stocks with triangle patterns, it is important to determine the time frame. Since we are looking back at the first quarter of this year, our series of highs and lows does not have to go back very far. Other formulas can be written that filter for patterns on a weekly basis, these are great patterns for investors who don't watch positions every day. In either instance, we are looking for a stock that has a recent high that is less than the previous high, and a current low that is greater than a previous low.

HHV3LLV8

In this basic example, HHV3(highest high value in the last 3 days) has to be less than HHV8(Highest high value in the last 8 days), and LLV3(lowest low value in the last 3 days) has to be greater than LLV8(lowest low value in the last 8 days). This would give a list of stocks that are forming crude but effective triangles over the past 2 weeks or 8 trading days. This is a very simple example; if interested in more detailed formulas, send an email with what software system you are working with.



The above chart of Dril-Quip Inc. is a great example of a series of triangles and how they serve as great areas to add to positions or initiate new ones.

Some sites to play around with filters and scans:

http://screener.finance.yahoo.com/newscreener.html

http://www.stockfetcher.com

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The new quarter has started and new money should come in from mutual funds and pensions this week. It should not be enough to cause a major rally, especially with the flood of earnings announcements that start in just about 2 weeks. Below are a couple charts to watch to get a handle on where we are and where things could go. There are no divergences in the Adv/dec averages in either the SPX or the Nasdaq Composite. This could change at any time. Goldman Sachs (GS) is also a good stock to watch, it seems to validate any market move if it follows with volume.