Wednesday, June 27, 2012

CVX: Bubbling up

Oil and the companies that exploit it have been on the decline since March. Oil prices don't move for simple reasons. The petroleum market has more moving parts than most. The charts, however, tell me that it's time to take a look at this sector.

Light sweet crude futures peaked March 1 at $110.55 and have fallen fairly steadily down to a low of $77.56 on June 22.

That's the background, but my shtik is stocks and their options, so I'll analyze a specific company: Chevron Corp. (CVX), the second-largest U.S. based oil and gas company and the fifth-largest globally.

The company, headquartered in San Ramon, California, is active in more than 180 companies. Its operations cover the energy sector -- oil, gas, geothermal, biofuels.

I chose Chevron over its larger U.S. competitor, ExxonMobil (XOM), based on analyst enthusiasm. My enthusiasm index for XOM is 100%, and for CVX, it is 69%. CVX has room to grow in the affections of analysts. They are already totally head over heels in love in XOM.

(The enthusiasm index gives positive weight to Strong Buy recommendations, and negative to Hold, Sell and Strong Sell. Buy recommendations are ignored.)

The CVX chart generally tracks that of crude futures. The price hit a swing high of  $112.28 on March 14, and then stair-stepped down to a low of $95.73 on June 4. It has since set a high within a new upswing, followed by a higher low, and is now bubbling up in the second day of a rise that will set a higher high if it moves beyond $104.65.

The stock is now trading at $102.50 (as of this writing), so there is capacity for a 2.1% gain before the price hits resistance.

Longer term, CVX has been moving sideways since February 2011, with the trade segmented into several levels. The most recent has very roughly $96 as a floor and $110 as a ceiling. The floor could also be set at $98. There are some ambiguities in this chart.

Focusing back on the current leg, though, the key lower level is $98.17. A fall below would eliminate the possibility for now of a new uptrend and destroy the rationale for a bullish position.

Chevron has return on equity of 23%, growth stock levels, with extremely low long-term debt of only 7% of equity. Institutions own 62% of shares, and the price is discounted so that it takes only 78 cents in shares to control a dollar in sales.

In 2010 and 2011 earnings accelerated into the 2nd quarter and then fall off. The 1st quarter of this year is consistent with that pattern. Comparing current quarters to the prior quarters, Chevron has seen a steady rise in earnings.

All of the past 11 quarters have seen earnings surprises, three of them to the downside.

CVX on average trades 8.1 million shares a day, sufficient to support a good selection of option strike prices with high open interest and narrow bid/ask sperads.

Implied volatility stands at 24%, about mid-way through the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $99.16 and $105.90 over the next month.

Both calls and puts are showing volume well below their 5-day moving averages, with the activity tilted slightly toward calls.

The price is at the high end of the fair-trade range based on the last five days of trading. The range encompasses 68.2% of trades surrounding the most traded price, $100.75, and stretches from $102.42 down to $98.24.

Chevron next publishes earnings on July 26. it goes ex-dividend in August for a quarterly payout yielding 3.51% annualized.

Decision for my account: A chart moving up while 2% below resistance gives some decent chances of profit even if there is no breakout. It's a short term trade, so I'm looking at either single options or spreads. I'm not terribly confident that there will be a breakout, so I'm inclined toward a hedged position.

I've opened a bull put spread expiring in July, short the $100 put and long the $97.5 put. This gives me  about a 28% profit over the amount risked, and the position will be profitable at expiration down to around $99.40.

If I were doing an unhedged postion, I would set the stop/loss at $98.16, a penny below the lower low level that would negate any possible uptrend. That's about double the $2.02 average intra-day movement of the price (the Wilder Average True Range indicator).

Since a bull put spread is already hedged, I won't put on a formal stop/loss but will be watching that level closely.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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