As you may know, I am someone who rarely uses a chart pattern or signal as the basis for a trade. I tend to do "top down" analysis, meaning that I start with the big picture, the economic and fundamental conditions, then drill down to individual companies that those conditions suit. Once I have settled on how to trade my view, I do look at the chart, but it is more about looking for basic support and resistance levels off which to set entry and exit points than anything. Sometimes, though, I do things kind of backwards, starting with a striking chart pattern, then confirming the trade by analyzing the fundamental conditions.
That is what has happened this week when it comes to Transocean (RIG), where both the chart and the fundamentals support buying the stock.
Let's start where I did, with the technical picture. There are two ways of looking at the above 1-Year chart for RIG. The glass half empty look is that in the middle of this year, it tried to break higher but failed, forming as it did a very bearish "batman ears" kind of head and shoulders-ish pattern. The glass half full look, however, is the exact opposite, that it is now in the process of bouncing off of a strong support that has held multiple times in the past. On balance, I prefer the optimistic view here, because the support has proven so reliable all year. RIG has tested it on nine separate occasions in 2023 and it has always held. That is quite remarkable, and notable because RIG, like all oil…
As you may know, I am someone who rarely uses a chart pattern or signal as the basis for a trade. I tend to do "top down" analysis, meaning that I start with the big picture, the economic and fundamental conditions, then drill down to individual companies that those conditions suit. Once I have settled on how to trade my view, I do look at the chart, but it is more about looking for basic support and resistance levels off which to set entry and exit points than anything. Sometimes, though, I do things kind of backwards, starting with a striking chart pattern, then confirming the trade by analyzing the fundamental conditions.
That is what has happened this week when it comes to Transocean (RIG), where both the chart and the fundamentals support buying the stock.
Let's start where I did, with the technical picture. There are two ways of looking at the above 1-Year chart for RIG. The glass half empty look is that in the middle of this year, it tried to break higher but failed, forming as it did a very bearish "batman ears" kind of head and shoulders-ish pattern. The glass half full look, however, is the exact opposite, that it is now in the process of bouncing off of a strong support that has held multiple times in the past. On balance, I prefer the optimistic view here, because the support has proven so reliable all year. RIG has tested it on nine separate occasions in 2023 and it has always held. That is quite remarkable, and notable because RIG, like all oil stocks, is heavily influenced by the price of oil but, more than most, it also has a life of its own, and the fundamental factors that set RIG apart also support the bull case suggested by the chart.
They are specialists in offshore drilling, something that regularly comes under political scrutiny in the developed world, so politics also has a big say in where the stock trades. That makes the end of this year an interesting time to look at RIG because, while I don't want to spoil everyone's Christmas spirit or holiday cheer by pointing it out, the fact is that next year will be a Presidential election year in America. Based on recent history, that means that those of us who live there will be subject to lies, distortions, disinformation, and vicious personal attacks dressed as political discourse, but it also means that as potential voters, we will be pandered to, and that is good news for RIG.
One assumes that any Republican administration would be considered good for the stock given their general support for oil and disdain for alternative energy, at least in their rhetoric. However, that perception of the public that Republicans have an energy policy that is more realistic, as well as better from the point of view of national security and, something very important to Americans, the price of gasoline, can give RIG a boost no matter how things go in the run up to the November vote.
Joe Biden can be accused of some things, but being overly dogmatic or idealistic isn't one of them. He has, after all, been a politician his whole life, so is very well versed in doing what benefits him and that can practically be done, even if that contradicts what he says. As much as a boost to spending on alternative energy was presented as an inflation reduction measure, he knows, I'm sure, that a major contributor to inflation has always been higher oil prices, and inflation is a big issue in the election. With that in mind and with OPEC+ cutting supply, restricting US output is not a particularly smart thing to do right now, while opening up some offshore drilling sites at least gives the impression of trying to counter OPEC's moves.
Of course, none of that really matters if oil prices collapse with more supply, but that doesn't look likely. I have said here a few times recently, the demand side of the oil pricing equation in the US gives everything a bullish tone right now, and that has been confirmed this week by the Fed's embracing of the possibility of rate cuts next year, relatively tame inflation data, and continued indications of both a tight labor market and consumer strength. A "soft landing" in the US now looks not just possible, but actually likely.
One last reason why I like buying RIG around here…it has a history of being a trading stock in the sense that it generally respects levels and chart indicators. Look again at the chart above and you will see that in addition to the support at around $5.50 that has proven so reliable, the stock has also bounced off a couple of resistance points, at around $7.50 in February and March, and $8.70-80 more recently. In fact, once a support or resistance level has been established, it has held when challenged ten times this year and been broken only twice. That makes me like the odds that the $5.50 support will hold again this time around, no matter what.
Last, and by no means least, buying RIG at current levels with a stop set off that $5.50 support and a target of a bounce back above $8 is a trade with a very good risk/reward ratio.
So, add it all together and you have a stock that the chart suggests will bounce back strongly, that is supported by both economic and political fundamentals, and that sets up with a variable risk/reward. In short, it pushes every button, making it look like a great trade however you look at it.