The other day we saw Murray comparing a chart of Woodside Petroleum to the oil price. “Hey Murray…what’s that?”
“It’s a chart.”
“Right. What is it telling you?”
“A lot of things. It’ll be easier if I just send you the conclusion…”
So later, he did. His note began, “Oil is up. Stocks are up. But here is the trading question: is Woodside and petroleum a buy at these levels? To answer that, you have to look at WPL and oil side by side.
“A simple comparison of the Brent crude price and WPL (see below) shows how impressive Woody’s rally has been from the lows. We can see that in Fibonacci terms (useful for tracking a stock’s movement over a discrete period) Woody’s has retraced to its .618 of the whole move down from all time highs. In comparison oil hasn’t even reached its .382 retracement. Advantage Woodside.
“You’ve also seen a big rally in the Australian dollar over this time. This lowers Woody’s AUD earnings. But the stock is being priced for growth anyway. Investors are obviously starting to appreciate the long term value and growth in WPL over the next few years. And why not? The long term story for WPL remains very sound and one that I would want to be exposed to.
“Having said that, WPL may have gotten a bit ahead of itself at these levels. The stock price is resting on the top of the channel. And you can see the stock has moved up and down-but always stayed within-that channel since the lows of 2008. With the stock at the top of the channel now, you’d want to be cautious about entering any longs. The risk is that the stock tests the top of the channel, fails (as it has done consistently) and moves to retest the lows.
“If Woodside is ahead of itself, what about oil? The chart shows that oil itself is looking weak and could see a retest of recent lows around $60. This would definitely put some pressure on WPL. But that’s not all bad news if you don’t have a long term position in WPL already.
“If WPL is to maintain its current uptrend we could easily see a pullback towards $45. That could provide a good risk/reward buying opportunity. You get the stock you want to own. But you get it a technically good time, without overpaying or buying in before it retests the lows.
“But a resumption of the downtrend in the overall market could see even lower levels for the stock. And that is the big risk right now. Even though WPL is a stock you should own as a long-term energy bull, there will be an opportunity to buy it at better levels in the future. If you own it now, you ought to either take some profits off the table or prepare to have your conviction challenged.
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