Friday, October 4, 2013

MRO: A bear in the oil patch

Marathon Oil Corp. (MRO) broke below its 20-day price channel on Thursday and confirmed the bear signal by trading still lower today, although with an intra-day rise at lunchtime.

It was the second bear signal since the stock peaked at $37.87 on Aug. 5, culminating a long-term rise that began from practically nothing on Nov. 8, 2008, in the depths of the Great Recession.

Using Elliott wave analysis, I've counted five waves up from 2008 in a 78.6% Fibonacci retracement of the decline from the pre-recession peak of $46.34 attained in June 2007.

MRO 3 years 2-day bars (left), 90 days 2-hour bars (right)

The chart is positioned for a long-term downward move, a wave (B), that typically would retrace to one of several Fibonacci levels over a matter of years.

Fibonacci Levels

Wave (B) appears to be beginning as a downward zig-zag at some level. Given the likely time span of wave (B), I can't say for certain which magnitude the internal waves are tracing (waves a-b-c). All I can say is that the chart is clearly bearish.

MRO's first bear signal of the wave (B) downtrend proved to be a failure. It lost 0.1% over 18 days.
The stock has produced 17 bear signals since the start of the wave (A) uptrend. Six were successful producing a 10.7% profit over 29 days. Eleven failed for a 4.3% loss over 17 days. Despite the losing odds, the win/lose yield spread is quite respectable, at 6.4%.

Marathon Oil, headquartered in Houston, Texas, explores for and produces oil and natural gas in North America, Europe, Africa and Iraq.

Marathon is a creature of the fossil fuel markets. As goes oil and gas, so goes Marathon.

It is impossible to think seriously about a commodity player like Marathon without considering the Republican Party's threats to force a default in U.S. debt by refusing to extend borrowing authority, which will make it impossible to pay dividends on U.S. bonds, notes and bill from Oct. 17.

The U.S. Treasury on Thursday released a report that said,
A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world...
All of which is music to bearish ears. Fossil fuels are priced in dollars. If the markets lose faith in the dollar because they've lost faith in America's willingness to pay its debts, how much longer will the Saudis and the Russians be willing to take dollars for their product?

The full Treasury report is "The Potential Macroeconomic Effect of Debt Ceiling Brinkmanship".

Analysts, no doubt based on conditions prior to the present crisis, give a positive assessment of the company's prospects, collectively coming down at a 38% enthusiasm rating.

Marathon reports return on equity of 9%, with debt amounting to 34% of equity. The company has shown a profit in each of the past 11 quarters that I'm using in this analysis.

However, profits have generally tended to decline over that period. The most recent quarter is the exception, as it showed a sharp rise from both the prior quarter and the year-ago quarter.

Five of the quarters have produced upside earnings surprises, and six, including the most recent three, have surprised to the downside.

Institutions own 80% of shares. It takes $1.47 in shares to control a dollar in sales.

MRO on average trades 5.1 million shares a day, sufficient to support a moderate selection of option strike prices spaced a dollar apart. Open interest runs to the three figures for those strikes I would use to construct a position.

The bid/ask spread on front-month at-the-money puts is 1.7%.

Implied volatility stands at 28%, slightly below the mid-point of the six-month range. It has been rising since Sept. 25 although it now appears to be faltering.

Options are pricing in confidence that 68.2% of trades will fall between $31.39 and $36.85 over the next month, for a potential gain or loss of 8%, and between $32.81 and $35.43 over the next week.

Trading in call contracts is quite active today, with volume running nearly four times the five-day average. Put contracts are languishing at less than a third of average volume.

Marathon Oil next publishes earnings on Nov. 4. The stock goes ex-dividend in November for a quarterly payout yielding 2.23% at today's prices.

Decision for my account: The chart is sufficiently bearish to support a trade. The odds of success are weak, but there's just not much data for the present downtrend and so I don't give the odds analysis much weight.

The worst case extrinsic scenario, a federal default, is excellent for a bear trade -- barring bankruptcy. The worst danger to a bear position is that the crisis ends suddenly and dramatically, causing a celebratory market rise. Since the markets haven't really done much to price in a default yet, that sort of upward spike would be irrational, but when has irrationality stopped the markets from doing as they will?

I intend to open a bear position in MRO if it shows downward momentum near the end of the trading day, structuring it as a bear call spread. I'll update this analysis near the closing bell with my final decision.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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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