March 18th, 2009

Round 6 in the Oil Patch

Cramer held one of his mock contests tonight between Technical (TA)and Fundamental (FA) Analysis. In the TA corner this time was SII (Smith Industries) and he placed RIG (Transocean) in the FA corner. Now I get very excited when someone stages one of these “boxing matches”.

It reminds me of one he held on January 14, when he staged a match around the question of whether COP (ConocoPhillips) was then a good buy at 51.20. He claimed that “technicians are willing to give up on COP too easily when there are so many bullish reasons to like the stock” but fundamental analysis says that “COP is even more of a buy if it drops” to the support level technical analysts were looking at. Today, COP closed at 37.60, down 27% in 9 short weeks. Cramer got his wish for COP to be a better buy and those who followed his recommendation suffered a whopping loss!

Tonight, back in the oil patch, Cramer said that even though TA people like SII, he preferred RIG and backed up his choice with what he claimed were strong fundamental reasons. His technician at theStreet.com, on the other hand, gave a more compelling OBV (On-Balance-Volume) track as the explanation for his choice of SII.

Regular readers are familiar with one of my favorite sayings (when it comes to the stock market, that is) that “50% of a stock’s price movement is attributable to the total market, 30% to the sector and only 20% to the stock itself.” I wanted to see the real story in this contest. How different were the charts of SII and RIG? More importantly, did other stocks in the Oil Industry Groups have similar charts?

What becomes clear when you scan these charts is that they’re being driven by common underlying economic forces since all their charts look nearly identical. As a matter of fact, these charts don’t look too dissimilar from many of the charts I shared with you in the Google Spreadsheet in yesterday’s Prospecting for Stocks with Potential). See if you can see the similarities:

I could go on and on but you get the picture I’m sure. Something fundamental is going on in the Oil patch (or at least with the stocks of these companies) as many of the stocks are on the verge of bumping up against similar resistance trendlines.

Furthermore, all these stocks and thousands more are wrapped up in the overall market’s general base-building process. In the same way that I warned readers to stay in cash since February, 2008, I began writing that the market was in a base-building process October 20.

We knew it would take some time due to the depth and steepness of the Crash. But I believe that after 5 months, we’re now about 60-70% of the way finished, in Round 6 of this match. We’re going to start seeing more and more stocks cross above their moving averages, break above critical resistance trendlines and begin making new upward trends. But the whole process could still all collapse into an even greater economic crises so caution is still needed.

While RIG may look better than SII to Cramer, I’d like to call it a draw at least for this round. I’ll just wait for the final decision until a few more rounds in this match.

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