Last week’s article dealt with finding a good entry price for highly rated oil company stocks that appeared to be overpriced. The strategy was to identify a range then determine a value zone defined as 50% to 62% of the range. It basically identified areas that would be good to buy in the direction of the main trend. It’s a technique typically used by investors who are cautious about buying strength out of fear of buying a top.
The downside of this technique is that sometimes momentum takes over and the stock never reaches the value zone. Nonetheless, it is one strategy that should be kept in the toolbox of aggressive traders and more conservative investors. While waiting for a pull-back into a value-zone may be a valid strategy under certain trading conditions such as a strong uptrend, there are times when oil stocks are driven higher by other factors.
Oil company stocks are influenced by several factors. Simply stated, a portion of a strong rally is attributed to good earnings. Another portion just follows the broad-based market. Another part of the rally may be fueled by bullish fundamentals of an underlying commodity. When it comes to energy-related companies, for example, the price of oil often has a huge influence on a stock’s movement. However, not all oil companies move the same when oil prices spike higher. This makes sense because some oil companies deal with oil already in storage and others deal with it still in the ground.