Oil Stocks – Breakouts! What’s Next?

After a rather poor November and a bad start to the new month, the bulls have finally come together and acted.

This resulted in a climb above the first resistances, but how far north can they go? Where can the buyers be stopped by their opponents to spoil pro-growth plans?

NYSE Arca Oil Index (XOI) – The Current Overview

If any of you are wondering what happened at the same time with the oil stocks index, I invite you to analyze the chart below.

Oil Stocks – Breakouts! What’s Next? - Image 1

The first thing that catches the eye on the above chart is the breakout above the upper border of the yellow consolidation, in which the index was stuck for a couple of weeks. This is a positive sign, which could translate into further improvement – especially when we factor in buy signals generated by the CCI and the Stochastic Oscillator.

Nevertheless, please keep in mind that it would be even more positive and reliable only if we see a weekly closure above the formation.

How did this price action affect the short-term chart? Let’s check.

Oil Stocks – Breakouts! What’s Next? - Image 2

From this perspective, we see that the recent increase in stocks took the index above the short-term resistance line based on the previous highs. At the end of the last week, the XOI verified the breakout, which translated into further improvement.

Thanks to the recent price action, the bulls managed to climb above the first important resistance zone created by the Nov. peaks, the 38.2% and the 50% Fibonacci retracements, which, in combination with the breakout above the upper line of the consolidation (marked on the weekly chart) opened the way to higher levels.

However, at this point, it’s worth keeping an eye on the position of the indicators as the CCI moved to its overbought area, while the Stochastic Oscillator is quite close to doing the same.

What does it mean for the stocks?

That the space for gains may not be as wide open as it seems at first glance. Nevertheless, as long as there are no sell signals, the bulls may want to climb to their nearest target and test the strength of the next resistance zone around 1,912.33-1,915.81created by the 61.8% Fibonacci retracement and the early Nov. peaks.

Summing up, the breakout above the short-term resistance line and the upper border of the consolidation opened the way to higher levels, which, in combination with the buy signals generated by the daily indicators (yup, they remain in the cards), suggests further improvement and the test of the early Nov. peak in the coming days.

So now that we know how the current situation in the index looks like, let's check what's happened in the last few weeks on the chart of one of the companies.

Exxon Mobil – The Consequences

Oil Stocks – Breakouts! What’s Next? - Image 3

In the last commentary on the stocks posted on Nov.30, 2013, you could read the following:

(…) Although the bulls won a white candle on Nov.24, it has a long upper shadow and was formed on a very small volume (!!!), which didn’t bode well for the bulls.

It didn't take long to see the results. Despite repeated attempts to break through to higher levels, the daily highs continued to fall, prompting the bears to attack during yesterday's session.

What did that lead to?

First of all, to form a large red candle, which closed below the lower border of the blue triangle, suggesting that another bear attack might be just around the corner.

Why? Because triangles are inherently continuation formations. The movement preceding the pattern was to the south, suggesting that the bulls may have problems during the next sessions - especially when we factor in the volume, which unfortunately for the stockholders increases during the declines.

How low can the price go?

If the bulls fail to maintain their main ally - the medium-term green support line based on previous lows (…), the road to at least 98.50 will be likely open.

Why here?

Because in this area, the downward move will be equal to the height of the blue triangle, which according to technical analysis is the minimum range of the move after breaking out of the formation.

Looking at the daily chart, we see that the situation developed in line with the above scenario, and the bears were able to execute a pro-declining plan earlier this month. The beginnings of their journey were not easy, as the bulls struggled to keep the price within the triangle. However, the breaking of the medium-term green line of support completed their defeat and opened the way to the south (just like I wrote in the summary of the last article).

As you can see, the sellers not only reached the downside target but also managed to push the price to a fresh multi-month low of 97.48, where the lower line of the black declining wedge was. This support, in combination with the bullish divergences between the price and the indicators and the bullish engulfing candlestick pattern (marked with green), encouraged the buyers to come back to the trading floor.

In a very short time, the bulls jumped over key lines of resistance (the upper line of the black declining wedge and the short-term red declining resistance line), resulting in a further march into the north.

Thanks to yesterday’s white candle, the price came back above the medium-term green line, invalidating the earlier breakdown, which is a bullish signal that suggests higher prices in the coming days – especially if the bulls manage to close the week above this key line.

How high could stocks go?

Looking at the daily chart, we see that despite the above-mentioned improvement the price is still trading under the first Fibonacci retracement, which now serves as the nearest resistance. Additionally, when we take a closer look, we can also notice that stocks reached the blue dashed line – yup, the upper line of the blue triangle - the formation that brought them defeat at the turn of November and December.

On Monday, it was strong enough to stop the buyers and trigger a pullback. Yes, at that time, it was also supported by the medium-term green line, which, when broken, became the resistance. Nevertheless, in my opinion, as long as this nearest resistance area is not broken, I would watch the strength of the bulls closely.

Why? Because yesterday’s candlestick was formed at a lower volume than the day before, which should be a first wake-up call – especially when we factor in the nearest resistances.

In other words, if the bulls prove their strength and climb above 103.36, the path to higher levels will be open (especially if they close the week above the medium-term green line, which again serves as support). If they manage to do so, we could see an increase to at least around 104.48-105.47, where the next resistance area currently is.

Summing up, although the bulls showed strength in recent days and broke above key resistance lines, there are some factors that suggest caution in making investment decisions. However, given the proximity of the nearest resistance zone, they will have the opportunity to prove their power in the coming days. If they emerge victorious from this battle, the path to the next resistance zone will be open.

Finishing today's article, I invite you to join our community and encourage you to comment.

See you tomorrow.

Anna Radomska