Oil Stock Sends Up Sell Signal Before OPEC Meeting

KMI stock is encroaching on a key trendline

Jun 15, 2018 at 2:30 PM
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In one week, the Organization of the Petroleum Exporting Countries (OPEC) will convene in Vienna. The cartel's decision on oil production could determine the trajectory of crude prices, in the short term at least. Ahead of this big event, one energy stock is sending up a historical "sell" signal: Kinder Morgan Inc (NYSE:KMI). In fact, KMI stock is encroaching on a trendline that's smacked it lower several times in the past -- and with the equity's short-term options at a bargain, bearish speculators may want to consider scooping up near-term puts.

Specifically, Kinder Morgan stock has bounced 14% since touching a two-year low of $14.69 in early April, and is now within one standard deviation of its descending 160-moving average. The last three times KMI shares approached this trendline after a lengthy stay below it, the equity was lower 100% of the time one month later, averaging a loss of 5.64%, per data from Schaeffer's Quantitative Analyst Chris Prybal. From KMI's current price of $16.72, a similar pullback would place the security around $15.81.

KMI stock chart june 15

Despite the energy stock's long-term downtrend, 12 of 17 analysts maintain "buy" or better opinions, without a single "sell" in sight. In the same vein, the average 12-month price target of $20.60 represents a premium of more than 23% to KMI's current price. Should the stock once again backpedal from trendline resistance, or should OPEC's decision weigh on oil prices, a round of downgrades and/or price-target cuts could further weigh on the shares.

Likewise, options traders have ramped up their bullish exposure lately. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume stands at 8.30 -- in the 83rd percentile of its annual range. This means Kinder Morgan options traders have bought to open calls over puts at a faster-than-usual clip during the past two weeks.

Digging deeper, in the soon-to-be front-month July series of options, the overhead 17-strike call is home to peak open interest of 7,700 contracts. This abundance of bullish bets overhead could translate into an added layer of options-related resistance for KMI in the short term.

As alluded to earlier, Kinder Morgan's near-term options are a relative bargain right now. The stock's Schaeffer's Volatility Index (SVI) of 21% is in the bottom quartile of its annual range, suggesting short-term options are pricing in relatively low volatility expectations for KMI shares. At the same time, the stock sports a Schaeffer's Volatility Scorecard (SVS) of 91 out of 100, suggesting the equity has handily exceeded options traders' volatility expectations in the past year.

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