Breakout watch: Stocks on the brink

04/04/19
  • COP diverges from oil prices, drops near major support
  • Facebook (FB) broke out of a two-month trading range yesterday
  • Traders caught on the wrong side of the market can fuel breakouts

If you’re looking for something to “happen” in the market, one place to start is in high-momentum, high-volume stocks that haven’t been doing much for a while.

With that in mind, let’s take a look at two stocks from two very different industries that present two distinct, but related, pictures.

Possibly lost in all the hoopla surrounding the US equity market’s huge first quarter was the fact that crude oil staged its biggest Q1 rally since 2009: May WTI crude oil futures were up 28% at the end of March, and as of yesterday that gain had expanded to around 33%.

Traders may be anticipating a breakdown in the stock if the test of support coincides with a slowdown or reversal of the crude rally.

The move has been a boon for many big oil stocks, including ExxonMobil (XOM) and Chevron (CVX), both of which boast double-digit year-to-date percentage gains, despite lagging the crude market’s return.

Then there’s the curious case of ConocoPhillips (COP), an oil-sector leader for most of last year that outpaced the majority of its competition as well as the oil market itself. But since late December, COP has trailed crude oil by a wide margin:

ConocoPhillips (COP) and May crude oil (CLK9), 12/24/18–4/3/19. Oil rallies, COP dallies

Source: Power E*TRADE


As of yesterday COP was up around 16% since December 24—nothing wrong with that—but it in February its divergence from the ongoing crude oil rally accelerated as the stock formed an extended trading range that has repeatedly bottomed around $65:

ConocoPhillips (COP), 12/10/18–4/3/19. ConocoPhillips (COP) price chart. Near support.

Source: Power E*TRADE


Since a two-day upswing in late-March, COP has edged back toward this support level. At the stock’s price around noon ET yesterday ($66.20), even a decline that simply tests (again) the support level represented a 1.75% down move. And some traders may be anticipating a breakdown of the support level (and a more significant decline) if that test coincides with a slowdown or reversal of the crude rally, something that can’t be ruled out given how hot the market has been recently.

The following chart of Facebook (FB) flips COP’s breakout script. When the stock jumped 11% on January 31 to around $167 after a surprise earnings beat, many analysts boosted their profit targets to $190 or higher.1 But FB then moved sideways for the next two months, roughly between $160–$175, until a big up day (+3.3%) on Tuesday propelled the stock to the very top of its trading range:

Facebook (FB), 8/16/18–4/3/19. Facebook (FB) price chart. Upside breakout.

Source: Power E*TRADE


Yesterday morning, though, the stock transitioned from threatening to break out to actually doing it, rallying another 2% to its highest point since last August. But it turned out to be a short-lived move: The stock reversed later in the session, falling back below the breakout level and dropping into the red on the day.

So is this breakout story over?

Yesterday was just one day. "False breakouts" like this occur all the time, which is why many traders want to see a stock close above (rather than just penetrate intraday) a breakout level before lending credence to an upside breakout. That could still happen. Longtime traders also know that after an initial breakout surge, prices often pull back to (or a little past) the breakout level before resuming their move.

In other words, there will likely be plenty to watch in these stocks in the coming days.

Note: FB is scheduled to release earnings on April 24, COP on April 26.

Market Mover Update: Semiconductor stocks surged yesterday, including a 5% intraday jump in Micron (MU) and a nearly 4% rally in Nvidia (NVDA). Santander Consumer (SC) popped 2.4% intraday.

Today’s numbers (all times ET): European Central Bank (ECB) minutes (7:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Constellation Brands (STZ), RPM (RPM).

 

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1 StreetInsider.com. Facebook (FB) PT Raised to $190 at Morgan Stanley. 1/31/19.

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