Aggressive Traders, Take a Look at Schlumberger

 | Apr 26, 2017 | 9:09 AM EDT
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Schlumberger (SLB) has been in a slump over the past three months, declining to around $74 from near $88 in January. Prices are retesting the lows of September and June. This could be when timid investors stand aside, but a gap to the downside last week (Friday) saw heavy volume. This kind of gap or price void could be an exhaustion gap.

Exhaustion gaps tend to come at the end of moves up or down. On the downside, a stock declines and declines, and traders hang on and on. They continue to hold their positions, despite the downtrend. Late in the trend, these stubborn longs "throw in the towel" and reluctantly dump their underwater positions. This belated urge to sell produces the heavy selling and the gap. Often times, after this heavy selling is out of the way and others, with a longer-term time horizon have absorbed the selling, the stock stabilizes and begins to move in the opposite direction.

In this daily bar chart of Action Alerts PLUS charity portfolio holding SLB, above, we can see the recent price gap (right hand side of the chart) with the heavy volume, but there is more. Prices are below the declining 50-day moving average line and there is a belated bearish death cross of the 50-day average and the 200-day moving average at the end of March.

The On-Balance-Volume (OBV) line has been in a decline for most of the time since August, suggesting that sellers of SLB have been more aggressive than buyers. Stability in the OBV line now would suggest a shift in sentiment.

In the lower panel is the 12-day momentum study, which shows a bullish divergence between the lower price lows in February and April and higher momentum readings. A bullish divergence tells us that the pace of the decline has slowed. Before a trend reverses from down to up, prices usually slow their descent.

In this weekly bar chart of SLB, above, we have mixed signals at this point in time. Prices are below the declining 40-week moving average line, so we know the trend is down. The weekly OBV line has been soft the past three months, but its longer-term pattern in sideways.

In the lower panel is the slow stochastic indicator. We don't use this indicator all that often, but we want to show what it suggests to us now. The stochastic indicator is an overbought/oversold indicator. It is coincident to market extremes, telling us when prices have gone up too fast or down too fast. Traders typically use readings above 80 or 85 as overbought and reading below 20 or 15 as oversold. You should be able to see that many of the low readings on this chart occur at tradeable lows.

In this Point and Figure chart of SLB, above, we can see that prices are in a decline or a down column (Os). Notice how the $74 level has held a number of times in the past. Note that the price of SLB could dip to $73.01 and we would not enter an "O" at $73 on this chart. It will take a rally to $77 to start an up column on this chart (Xs).

Bottom line strategy: yes, the trend is down and we want to trade with the trend, but aggressive traders could take a closer look at SLB if they can risk a close below $72.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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