Energy stocks as a group, while still tracking lousy performance in both absolute and relative terms year to date versus the broader U.S. stock market last week showed a spark of hope. Shares of oil services company Schlumberger Limited. (NYSE: SLB ) lifted a little less than 3% last week and from a reward to risk perspective increasingly look attractive at current juncture.
As a general rule, in order to put the odds in one's favor in trading and investing, it pays to follow the trends and not stubbornly fight strong up or down trending charts. Every once in a while however when a stock or sector shows extreme pessimism in both absolute and relative terms great trading setups can come to fruition. The trade idea I am eyeing in SLB stock to me fits this category.
SLB Stock Charts
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To gain some perspective, note that the Energy Select Sector SPDR (ETF) (NYSEARCA: XLE ) last week reached an exact 50% retracement of the entire rally off the early 2016 lows into the December 2016 highs. At the bottom of the chart, I plotted the XLE ETF versus the SPDR S&P 500 ETF Trust (NYSEARCA: SPY ) and the relative weakness is painfully obvious. As long as the XLE can hold the $64 area as support, the odds for a bounce look promising at the moment.
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On the multiyear weekly chart of SLB stock itself, we see that much weight is being pushed on the black diagonal support line and that from this angle it's difficult to make a bull case. In fact, some technical analysts may be quick to point to a major head and shoulders pattern that could eventually easily target a downside price in the low $30s.
However, one of the most important lessons I have picked up over course of my career in the financial markets it is that context matters and that stocks are a highly correlated asset class. To wit, should the underperforming energy sector get a bid in the second half of 2017 and the XLE ETF hold the aforementioned $64 area as support, then a stock like that of Schlumberger would most likely participate on the upside.
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Lastly, on the daily chart we see that while SLB stock continued on its one-way train lower until last week, momentum as represented by the MACD oscillator bottomed out in May, thus leading to so called positive divergence between price and momentum ever since.
With last week's rally SLB stock has pushed back above its yellow 21-day moving average and marginally above a simple purple-dotted diagonal line of resistance. The stock still has plenty left to proof, particularly with earnings scheduled for July 21st, but last week's rally was a start.
While I have little interest stepping ahead of the upcoming earnings report, should SLB stock hold up or rally after the report I would be inclined to establish a bullish position trough the stock itself or the options market with a first upside target in the $75-$76 area.
Check out Serge's Daily Market Outlook for July 17.
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