Unable to Hold

Oil Prices Rise, But Oil Stocks Set to Pull Back

By Bryan Bottarelli
Thursday, March 29, 2007 2:15 PM EDT
Thu, 29 Mar 2007 18:15:00 GMT

Dear Bottarelli Research Member,

A war premium continues to be priced into oil — yet the major oil stocks continue to exhibit bearish indicators. Case in point, look at the double-top formation we currently have on the Oil Service Index (OIH – AMEX).

OIH

Right now, oil prices are being completely dictated by news flow. Yesterday afternoon, for example, it appeared like the Iran/UK situation had been improving — with Iran officials saying that if the alleged entry into Iranian waters proved to have been a mistake “this can be solved.” Furthermore, Iran said that Britain’s “admitting the mistake will facilitate a solution to the problem.” But tensions spiked once again after Iranian television later showed the detainees — and this single event spiked the price of oil another $2.00 in afternoon trading. But once again, this big oil price spike is having only a minor effect on names like Weatherford International (WFT – NYSE).

WFT

Similar to the OIH, the recent oil price moves have not pushed WFT up has their last resistance point, which continues to paint a near-term bearish picture to my eye. In fact, published reports from oil traders indicate that even they expect prices to fall — which is probably why we’re seeing such cautions upside momentum in today’s oil stock trading. I think that if we can hold our water — and maintain our WFT puts — we’ll eventually witness a great payoff. After all, WFT has the ability to make big-time down moves, so the challenge here is to stick to our convictions and maintain our WFT May 45 Puts (WFT QI).

At the same time, let’s not forget about one of my longer-dated call position in Input/Output (IO – NYSE). If you recall, we entered the IO August 12.5 Calls (IO HV) back on February 13th after the stock hit a new 52-week high, which set the table for an extended upside rally over the next 4-6 months. And after a subsequent sell-off, the stock has now embarked in an impressive recovery — which supports the thesis of holding an August upside call position. If you have yet to enter this play, you might consider adding the IO August 12.5 Calls (IO HV) calls now.

IO

I’ve also received some notes from Charter Members who said that they were not stopped out of the Dow Chemical (DOW) play. If you’re still holding the DOW May 45 Puts (DOW QI), then you’ll like the looks of today’s chart:

DOW

As I mentioned before, the stock has been moving up purely on unsubstantiated take-over speculation. But as this speculation dwindles, the elevated stock price must inevitably come down — which is why I’m targeting a gap-filling move around the $44 level. I’ll continue to monitor the play.

And finally, I’d like to leave you with the interesting stock chart of John Deere (DE – NYSE).

DE

If you’ve been with me for a while, then you know that I love the longer-term prospects of heavy-machinery maker Caterpillar (CAT – NYSE). But while CAT is exposed more to the housing and development market, DE is a pure play on farm & construction machinery. And leading into the spring and summer harvest season, the exploding increases in corn supply (brought on by ethanol production) makes a very bullish argument for DE. As you can see by the chart, the stock just established a support point at the 50-day moving average — which could signal another run-up in the coming weeks. Keep this one on your radar for a potential longer-dated call play. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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