The WTI Crude Oil contract has bounced back above $50 after plunging to $42.36, the lowest low since June 2017. The recovery wave should signal the start of a multi-month bottoming or basing process that crisscrosses the magic number many times before bulls or bears take control. This sideways action should trigger strong bounces throughout the beaten-down oil patch, setting up all sorts of time-delineated buying opportunities.

The worst looking oil and gas stocks could produce the strongest returns in coming weeks, with the January effect now in full force. It is important to establish clearly defined holding periods if trading these issues because buying power is likely to fade through the first quarter, undermined by trapped shareholders dumping losing positions. In addition, crude oil's two-year uptrend is now broken, predicting that the recovery wave will end in coming months.

Chart depicting the share price performance of Encana Corporation (ECA)

Encana Corporation (ECA) broke 10-year support in the upper teens in 2015, entering a steep downtrend that posted an all-time low at $3.00 in January 2016. The subsequent recovery wave continued into early 2017, topping out near the breakdown level, ahead of two failed breakout attempts into August 2018. The stock then turned sharply lower, descending in a straight line into the .786 Fibonacci retracement of the two-year uptrend.

That ratio marks the last major support level ahead of downside into the 2016 low. It's also a classic price zone for the start of a bounce or intermediate uptrend. The unfilled Nov. 1 gap between $9.00 and $9.70 looks like a natural upside target, reinforced by the 50% sell-off retracement level and descending 200-day exponential moving average (EMA). A trade entry at the current price might yield high-percentage gains into that barrier, but a better opportunity might come between $5.60 to $6.00.

Chart depicting the share price performance of Transocean Ltd. (RIG)

Transocean Ltd. (RIG) has been decimated since 2010's Deepwater Horizon oil spill, dropping more than 90% to an all-time low. The stock broke support at the 2016 and 2017 lows near $7.50 during the most recent downturn, finally bouncing at $5.19 during the last trading week of 2018. The stock has now remounted broken support, setting off a failure-of-a-failure buying signal, similar to the 2B reversal outlined in Sperandeo's 1991 classic, "Methods of a Wall Street Master."

A Fibonacci grid stretched across the decline since October 2018 identifies potential upside targets. The price zone between $8.80 and $9.40 stands out as a first target, with resistance at the 50-day EMA and .382 sell-off retracement level. The descending 200-day near $10.60 will mark a more significant barrier if the bounce approaches the 50% retracement level. The most advantageous entry with this pattern might come on a reversal at the moving average, followed by a pullback to between $7.00 and $7.50.

Chart depicting the share price performance of Oasis Petroleum Inc. (OAS)

Oasis Petroleum Inc. (OAS) posted an all-time high in the upper $50s in 2014 and sold off in a multi-wave decline that ended at an all-time low near $3.50 in January 2016. The subsequent bounce topped out in the upper teens later that year, giving way to a steep pullback, followed by a 2018 recovery wave that stalled well below the prior high in October. The stock then sold off, breaking two-year support at $6.60 and the .786 retracement level of the 2016 uptrend at $6.30.

The January bounce is attempting to remount broken support and establish a failure-of-a-failure buying signal. This process could take time and a few setbacks, suggesting that market players stand aside for now, waiting for a volume-supported buying thrust that reaches $6.80 to $7.00. Aggressive traders can buy that spike with a tight stop loss, while conservative traders can wait for a pullback that tests new support.

The Bottom Line

Beaten-down oil and gas plays could post superior first quarter returns, underpinned by a improving crude oil market and the January effect.

Disclosure: The author held no positions in aforementioned securities at the time of publication.