The price action by Exxon Mobil (XOM) puts this stock on the radar this week. This market is significant because it is a major component of the S&P 500 Index as well as a strong indicator of future price action in crude oil.
When comparing the Exxon chart to the S&P 500 chart, one will notice the divergence between the two. Since reaching a top at $95.49 the week-ending July 26, Exxon has sold off sharply, reflecting the strong correlation to the price of crude oil.
Even with the broad-based S&P 500 market trading at an all-time high, Exxon has not been able to muster the slightest rally. This is because the market is too closely tied to the fundamentals of oil. Investors have decided that the stock is overvalued based on oil prices and this is the force putting the pressure on its price.
Since reaching a low at $86.39 the week-ending August 22, Exxon stock has stabilized, suggesting profit-taking or aggressive counter-trend buyers are propping it up for a possible retracement to the upside. A similar pattern can be seen on the weekly October crude oil chart. Prices have stabilized inside a major weekly retracement zone with the market reaching a low at $92.50 the week-ending August 22.
At this point in price and time on the charts, crude oil and Exxon on poised to play follow the leader. Since crude oil topped almost a month before Exxon topped, the chart pattern is suggesting that a rally in this market will spark a similar move in Exxon stock.
If October crude oil can sustain a rally over $95.03 then look for Exxon to mount a similar rally. Based on the current chart pattern, the major objective for crude oil is $99.03 to $100.56. A rally into this zone will likely mean Exxon will rally into its first target at $90.94 to $92.01.
The fundamentals are mixed at this time so most of the action in crude oil and Exxon will be driven by chart patterns and order flow. The chart pattern was just described in simple terms. Basically we are looking for both markets to form a support base and retrace at least 50% of its last break.
Order flow will play a significant role in how fast these markets will make their respective corrections or even if they are going to make the move. Order flow means buying and selling power. Throughout the summer, hedge funds and money managers had been dumping crude oil future positions because the supply and demand fundamentals have been overwhelmingly bearish. In addition, speculative traders have also been selling out because the potentially bullish geopolitical events didn’t pan out as expected.
Now that prices are relatively cheap, these major players may return to the market, giving crude oil and Exxon the buying support they need to produce strong short-term rallies. Based on the stabilizing patterns in both markets, these are two markets to focus on this week because of the strong possibility of a near-term short-covering rally.
Longer-term traders should also watch for the retracement because a short-term rally may give them the opportunity to re-enter these markets on the short-side at more favorable prices.