Is There a Buyers’ Trap in Big Oil?
While many traders on Monday were focused on the strength in financials, and the potential for higher prices in this long-suffering sector, other traders continue to look to the strength in energy stocks. Even as many of these stocks remain in bear market territory, the fact that sector leaders like Valero Energy Corporation (VLO) and Marathon Oil Group (MRO) are trading well-off their October lows (unlike many financials) has traders and active investors looking forward to trading these stocks on the long side once they make it back to the bullish side of the 200-day moving average.
Based on recent gains, however, many of these stocks are nearing short term overbought status, with some beginning to develop negative edges. This means that traders looking for short-term exposure to the upside may want to avoid these stocks for now, due to their increased potential for a short-term reversal.
Sunoco (SUN), for example, has earned some of the lowest ratings in the S&P 500 after becoming overbought on the first trading day of the week. Shares of Sunoco now have closed higher for four days in a row, with Monday’s strength putting the stock in overbought territory for the first time since late October. Then, a pair of overbought closes led to a drop of 6% in two days. Heading into trading on Tuesday, the stock has a negative edge of nearly 1%.
Of the stocks in its subgroup within the energy sector, oil and gas refining and marketing, Sunoco is among the most overbought in the short term. Nearing overbought levels but trading in bull market territory above its 200-day moving average are shares of World Fuel Service Corp (INT). INT rallied by more than 7% on Monday after pulling back for four days in a row, the last two in oversold territory.
Traders and active investors alike may want to keep an eye on the rally in Hess Corporation (HES), which sent the stock higher by more than 4% ahead of trading on Tuesday. HES would require significant additional selling in order to reach overbought status. But should buyers remain on the offensive through month’s end, traders may want to take a look at stocks like HES for potentially overbought markets where the edges have turned negative.
All of the stocks in today’s report were available from research and data available through The Machine. To learn more, click here.
David Penn is Editor in Chief of TradingMarkets.com