Get a Grip on This Oil Name

 | Apr 02, 2012 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

oxy

,

IEO

,

FRAK

,

PXE

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I've had my eye on Occidental Petroleum (OXY) lately, as the stock has seen a healthy downside correction since its late-February high. In particular, I've been watching both time and price parameters, trying to identify where it might look good to buy again. After all, the larger trend will continue looking good as long as the price remains above the Dec. 15 low.

The fund -- a big component of iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO), Unconventional Oil & Gas ETF (FRAK) and Dynamic Energy Exploration & Production Portfolio (PXE) -- is currently bouncing off a key price support zone between $90.97 and 91.98. This zone included the coincidence of two 1.618 Fibonacci price extensions, two retracements (0.382 and 0.786) and two 100% price projections of prior declines.

Occidental Petroleum (OXY) -- Daily
Source: Dynamic Trader

On the daily chart above, I've illustrated the two prior declines that were very similar to the most recent decline. The first -- the Sept. 27 high to the Oct. 4 low -- was a drop of $14.70. The second, from the Nov. 8 high to the Nov. 25 low, came to $14.96. The most recent decline, into the March 29 low, saw the stock fall $14.83. Many corrective swings in a market tend to be similar to others, which is why I've used the 100% projections to help identify possible support.

Besides the key price support, Fibonacci timing cycles also came due between March 29 and April 4 to suggest a low and reversal.

 I have seen buy triggers off this area, and so far Occidental shares have rallied $3.89 off the recent low. If price continues to hold above the March 29 low, the upside potential in the bigger picture is $110.71 -- which is target 1 on the chart, or a 1.272 Fibonacci extension of the Feb. 28 high to the March 29 low. If the stock ends up violating this price cluster zone instead, I will back off the buy side until further notice.

But I want to warn you about something as this stock makes its way up. As you can see on the chart above, rather important hurdle, the $95.87-to-$96.92 area, needs to be cleared. The price cluster includes quite a few 100% projections of the prior rally swings that also overlap a couple of key price retracements. If this area is not cleared, then Occidental shares will be vulnerable to another decline, rather than a continued rally.

How do I know this? Well, this same type of resistance put the kibosh on the rally that started from the March 22 low. Let's take a look at a 60-minute chart, and I'll show you where that failure occurred.

Occidental Petroleum (OXY) -- 60-Minute
Source: Dynamic Trader

On March 22, Occidental made a low at another key support decision and proceeded to rally $4.88. It then failed to clear the high end of a similar resistance zone between $98.92 and $100.07. This failure was followed by a healthy decline to the new recent low, made on March 29 -- which was $8.03 from the March 27 high.

So, what do we do with this information? First, if you are currently long this stock, you can tighten up stops if it fails to clear this key price resistance zone. If you are not already in Occidental, however, you could also wait until this zone is cleared by a healthy margin, and then buy on the next pullback. Shorter-term traders might even choose to use this zone for a short sale!

Just keep in mind that, should the stock clear this zone, that would indicate increased odds for a continued rally from the March 29. Bottom line: This is something to be aware of if you choose to trade this stock. Let's see what Occidental does around this next key price decision and trade accordingly.

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