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Tickers in this Article: BP, SLB, IOC, DRQ, FTI
Oil stocks have been under immense pressure lately following the BP (NYSE:BP) oil rig explosion and subsequent oil leak. BP has dropped over 50% as investors continue to worry about what the ultimate impact will be to the company and the environment. Investors are also worried about the impact new regulations or sanctions may have on the industry and have been fleeing stocks in this sector. Uncertainty may be the single largest fear for investors, as they aren't sure how to value something that is unknown; as a result, investors tend to sell first and ask questions later. Many oil stocks have broken through important support levels and may be under pressure moving forward.

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Schlumberger Limited (NYSE:SLB), for instance, recently fell under a large base that had been developing for a few months. SLB attempted to rally in April, nominally reaching new highs before rolling over sharply toward the bottom of the base. The recent breakdown was accompanied with an increase in volume and confirmed a double top pattern. SLB is currently in the process of attempting to move back into the prior base and is approaching some key resistance levels. Some investors may use this bounce to scale out of underwater positions. How SLB reacts to this selling will shed some light on the next possible move.


Dril-Quip (NYSE:DRQ) is another stock in the oil sector that recently suffered through a breakdown and is in the process of attempting to bounce back toward the prior base. DRQ has also seen a sharp increase in volume showing some urgency on the part of sellers. The level to watch in the near term would be around $51 as this level was acting as support before the breakdown. If DRQ can climb back into the base it could resume trading in a range, but the cards are stacked against DRQ longs at this point.


The chart for FMC Technologies (NYSE:FTI) looks very similar to DRQ. Both stocks surged to new highs in late April, but quickly reversed and headed back to the bottom of their bases. After a bounce from the bottom of the base, FTI also broke down under the base on increased volume. FTI is currently attempting to bounce back into its base and the current level near $55 should be monitored to see if sellers step in at prior support.


InterOil Corporation (NYSE:IOC) is a stock that also suffered through a 50% drop despite not being directly tied to the oil spill. IOC has been suffering through its own issues related to its operation in New Guinea, but is experiencing the same type of price action as others in its sector. IOC was trading in a base through the majority of 2010 before falling sharply from the top of the range down through the bottom. It is also attempting to bounce back into the base and should be monitored to see how it reacts to possible selling pressure.


Bottom Line
The common denominator among these stocks is that they broke under a base and are attempting to bounce back into the base. Often, prior support levels will turn into new resistance levels, as prior buyers attempt to get out as close to their entry prices as they can. How these stocks react to the possible selling pressure will go a long way to understanding the next possible action. Long investors need to be very cautious, as much technical damage has occurred to these stocks and it will take some time to repair this damage. There is still much uncertainty as to the ultimate outcome for this group, and investors may shy away from these stocks in the near term. The key will be to watch how these stocks react to this initial bounce attempt. If investors step in to sell these bounce attempts, then they may provide a shorting opportunity. If investors continue to buy, it may signal a possible start to a new trading range.

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At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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