Shares of oil services giant Schlumberger Limited (SLB, Financial) rallied last week along with the broader energy sector as the price of oil pushed higher. While the broader deflationary forces at work in the global economy still might see energy stocks revisit their January lows at some point this year, for the near to intermediate term, energy shares like SLB stock have well-defined upside targets.
Schlumberger reported its fourth-quarter results January 16, which included better-than-expected earnings but slightly disappointing revenues. The big battle for oil services firms now is how they will cut costs and remain nimble with oil prices at half their summer levels.
It is unlikely that oil producers and oil services firms assumed an oil price below the $50 mark as little as a few months ago, thus their models will need to be updated, the results of which will not really be seen until the coming quarters.
Looking at the multiyear charts, we see that despite the roughly 35% drop from July 2014 to mid-January of this year, SLB stock merely mean-reverted back down to its multiyear uptrend line. The post-earnings rally on Jan. 16 confirmed what looks to have been at least important near-term lows on Jan. 14, where the oversold bounce began.
From a momentum perspective, we see that the Jan. 14 lows also took place when the Relative Strength Index (RSI) at the bottom of the chart had reached oversold levels (which in the past led to rallies).
On the daily chart, we see that after last Friday’s nearly 3% rally, SLB stock pushed to new multi month highs and past the December highs. The entire price action since late November also can be looked at as an inverse head-and-shoulders pattern — one that appears ready to break past its neckline around $88.30 and begin to fill the empty space (the still unfilled part of the gap down from Nov. 28).
In early February, SLB overcame its down sloping 50-day simple moving average (yellow line), which after a retest last week held as support. Any break back below the 50-day moving average would be a sign that another retest of the January lows could be imminent.
However, in the meantime, active investors should focus on a well-defined upside target around the $93 area — the top of the gap down from November 28.
Note: Neither I get paid for writing the above mentioned article from the mentioned company in the article, nor i have any plan to open the position in the stock for next 72 hours.
