Schaeffer's Trading Floor Blog

Oil Part II

by 4/13/2005 2:02 PM
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Continuing the discussion below on oil stocks...I pulled the component members of the XOI and ran them through our equity scorecard to see how they looked...

  • BP PLC (BP) = 6
  • REPSOL YPF S.A. (REP) = 6
  • SUNOCO INC (SUN) = 7
  • TOTAL S.A. (TOT) = 6

Overall we see mostly decent scores. The lowest is score is only a neutral reading of five and the overall average is close to seven. I am now off to go through charts to see what stands out...


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New Lows

by 4/13/2005 1:34 PM
Stocks quoted in this article:

The action just keeps getting more interesting...a new round of selling has pushed the broad market indices to new lows for the session. While the indices are still well off of yesterday's lows, this more or less "erases" the gains from yesterday. In other words, the indices sit close to where they ended the session on Monday...

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Stocks quoted in this article:

The indices continue to hold a negative bias...

Chart Courtesy of Thomson/ILX

...but as can see the action has been rather choppy. I must admit that I find it somewhat curious that the bulls were not able to capitalize on yesterday afternoon's momentum...


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Index Check

by 4/13/2005 12:07 PM
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Before the day starts to slip away from me I want to check in on the midday action...

The picture remains mostly unchanged from what we saw this morning and can be described as general weakness, even as oil trades lower. Semis are still struggling...housing stocks and gold stocks are also slower..

Drug stocks were flat this morning but have just spike up as Merck just increased their earnings guidance for the first-quarter...

Note - I know the length of my last two posts was a bit unwieldy so I will try to keep them shorter...


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Stocks quoted in this article:

While I dig into the data on the oil stocks, I had a few quick emails to share...

Mike says - "Just wanted to reiterate the importance of not relying on just sentiment for trades. HDI had negative sentiment with an SOIR of 97%, SIR of 9.97 but an equity scorecard of 6.5. The stock had been in a slow uptrend for the last six months until breaking down a couple weeks ago. Yesterday, however, it jumped past its 20-day and 200 dma on higher volume before this morning's earnings. I made a paper trade based on the above data and I would've lost my shirt! Don't trade until all your "stars" align. (Or at least go for a straddle if you expect a big move but you're not sure which way.) Hope that helps. Thanks."

My response - Every person will need to find their own style. Mike presents a good point in waiting for "the right pitch" but I have another perspective to offer. Options give you leverage and immense profit potential with a defined risk. While a straddle is definitely one way to go, simply buying either a call or a put ahead of a big event (like earnings) can still be profitable over time. The key is to understand that losses will happen, but over time that leverage and profit potential can still result in a winning strategy. However, it important is to understand that you should only allocation a small portion of your capital to these risky trades.

Each person will have a different take on this, but I thought it was good to share a few views on this.

Mike also asked - "Hi again! I'm so glad you're discussing the oil stocks...after several days of pullbacks, I have to think a bounce is in order. One question, though: Is there a reason you use the ETF (SMH) when discussing the semis (as opposed to the SOX), but use the index (XOI) for oil rather than the ETF (OIH)? Thank you again, Mike P.S.: In re-reading the above, I have a sudden urge to sing, "E-I-E-I-O"! ;-)"

My response - Great question - I do flip back and forth among sectors and indices. In some situations the daily charts are nearly identical (SOX and SMH, SPX and SPY, the DJIA and DIA) so, for the most part, I don't think it matters which is looked at.

However, the OIH is based on the OSX (which tracks drillers) and not the XOI. The OIH and XOI do tend to move similarly, but there are some variances in the components stocks that can cause the small differences. No comments on your singing....

Dave says - "The broken trend line on the SOX 1/24 to 3/8 seems important, esp the sharp break away from that line, and the sliding movement along the descending 200ma. the Bollinger Bands are at an inflection and the SOX is breaking out to the downside. My favorite short in the group is Taiwan Semi, TSM. "

My response - Interesting perspective - thanks for sharing. For an example of the trendline Dave mentions, you can click on this post from early March to see the trend that was broken...

Ted says - "Regarding your comments about the "perfect" point -- I would love to see some discussion about weighing technical analysis i.e. MACD, Stochastics, RSI etc versus Sentiment indicators to decide when to enter / exit a trade to maximize profits. "

My response - There is always a risk in trying to boil trading down to simple points - it is much too complex for that. However, the short answer is that I think sentiment is best used to identify which stocks and sectors to look into and then technicals can help fine tune the entry. I will try give this topic some more thought and try to expand on it...


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