Comeback in This Oil Services Stock Could Deliver Double-Digit Gains
Ben Bernanke proved once again that he is the smartest man in Washington, D.C., this week, when he declined to begin the dreaded taper. Consensus was so strong for a reduction in the Federal Reserve's monthly bond buying program that everyone was caught off guard. Stocks took off and commodities, thanks to the falling U.S. dollar, went with them.
Whether you agree with Bernanke's plan or not, one thing is clear: The trend in stocks and many commodities is still to the upside. The latter includes crude oil, and the intersection of stocks and oil creates a good place to look for swing trading opportunities.
The Market Vectors Oil Services ETF (NYSE: OIH) began rallying almost a year ago with the overall stock market, and since its mid-April low, it has been outperforming with a gain of 22.3% versus 11.6% for the S&P 500. And during the August-to-September rally, its technicals improved with inflows of money, rising momentum indicators, and even a strengthening of its trend according to the esoteric Average Directional Index indicator.
In other words, oil services is a strong sector. And since a large portion of a stock's performance depends on the performance of its sector, this makes for fertile ground for prospecting. Many traders look for the strongest stocks in the strongest sectors, but given how far oil services has come, I prefer a different strategy. I look for stocks in strong sectors that are poised to play catch-up with their better performing peers.
This does not mean looking for the cheapest stocks or the most beaten down. If an individual stock's trend is down and its technicals provide no evidence of change any time soon, then that stock is not going anywhere. A rising tide may lift all boats, but not the ones that still have gaping holes in their hulls.
One oil services stock that is setting up for a move higher is Cameron International (NYSE: CAM). This stock went nowhere from February through mid-July, and then suddenly fell off a cliff after announcing its second-quarter earnings. On huge volume, it gapped down below both its 50-day and 200-day moving averages, as well as the trendline drawn from its June 2012 low. Clearly, this was a major technical break.
Now, two months later, Cameron has licked its wounds and even shown some moxie by rebounding to the bottom of the gap at $60.90. Trading is now taking place above the 50-day average and momentum has improved.
If the stock can close above $60.90, and preferably $61 to give it a little wiggle room, it will break resistance, as well as move back above the 200-day average. That would give it a shot at its 2013 highs in the $66-$67 area for a nice 10% gain.
Recommended Trade Setup:
-- Buy CAM on a close above $61
-- Set stop-loss at $59
-- Set initial price target at $67 for a potential 10% gain in eight weeks