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Portfolio Warning: Oil Companies Are Dying

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Portfolio Warning: Oil Companies Are Dying

Saturday, 19 January 2008

I just had to send this to you today. I want to make sure that everyone knows what could happen with three of the world’s largest oil companies. When you see one company perform like this, you can chalk it up to individual struggles… But when three companies are all showing the same pattern, well, that signals something endemic.
ConocoPhillips

This is one of the scariest charts I’ve seen in the energy sector in a very long time. We all know that most major oil companies move in a similar way. Correlation makes sense.

But with three companies all signaling an incredibly bearish move is in the works, I had to take notice. This chart shows a possible triple-top formation in Exxon Mobil (XOM:NYSE), Chevron (CVX:NYSE) and ConocoPhillips (COP:NYSE).

A triple top is a bearish pattern that results in average declines of 21%. Know what a move like that would do to these three? It would wipe away stock gains from the past year.

I know intuitively this doesn’t make sense… I mean, why would three of the world’s top oil companies be looking week with oil still over $90 a barrel? Two main reasons: The U.S. economic slowdown could mean a drop in demand and refining profits get hit hard with high oil prices.

(There are other reasons, and we’ve got a special report hitting the press right now on what’s going on behind the scenes and what you should do about it. Stay tuned for that.)

Here’s what to look for:

XOM close below $78.76
CVX close below $78.25
COP close below $73.75

Oh, wait. COP already did close below $73.75… yesterday.

A trading tip? Triple tops have a high pullback rate (84%) so you might want to consider playing a short decline rather than the average 21%. Statistics show that there’s an 85% chance that these stocks (if they close below those prices I listed) will drop by at least 5%.

Now before I sign off and let you go play in the frothy red seas of the oil industry, let me say this: The energy sector is not dead. Heck, even these three monsters can be jolted back to life. In fact, they more than likely will be. That means I’m still a long-term energy bull. But that doesn’t make me blind to an incredibly overextended market.

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Sara

P.S. I've recommended both ConocoPhillips (COP:NYSE) and Chevron (CVX:NYSE) to subscribers of WaveStrength services. If you're still holding a position in these two stocks, take your gains off the table.

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