(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Oil prices have dropped by 13% since hitting an intraday high of roughly $77 per barrel on October 3. But now those prices may be heading lower as the U.S. dollar strengthens.
Chevron's stock is trading around a critical level of technical support at $111.80. Should the stock fall below that support level it may result in the stock drifting even lower to its next level of support at $103.50 from its current price of $111.50.
The relative strength index (RSI) for Chevron has been steadily falling since peaking at overbought levels in early 2018. Additionally, volume levels have been steadily rising as the stock price has dropped, suggesting an increasing number of sellers.
Oil prices have been steadily falling in recent weeks and may fall even further. Oil is currently sitting above technical support around $65. Should the price fall below $65 it could drop to as low as $61. The RSI for oil has been trending lower which suggests bullish momentum is coming out of oil.
One reason why oil may be due to drop is that the dollar index, which is an index to measure the value of the dollar versus a basket of foreign currencies, is technically breaking out. A rising dollar puts downward pressure on commodity prices because it takes fewer dollars to buy the same number of units of the commodity. Should the dollar index rise above resistance around 96.75, it may increase to 98.
Should oil fall, it would have a negative impact on Chevron's stock because investors would begin to grow more cautious on the company's future revenue and earnings potential. But despite all the weakness in the oil markets, analysts have yet to lower their estimates for the company. In fact, since the end of September, forecasts for the balance of 2018 have increased. Should oil prices fall further, it could result in analysts having to cut estimates, potentially taking Chevron's stock lower with it.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.