Energy giants Halliburton Co. (HAL) and Schlumberger Ltd. (SLB) rallied strongly this week after OPEC agreed to historic cuts in an attempt to end a major supply glut that’s depressed crude oil prices in the last few years. That organization has a poor record of keeping its agreements so a skeptical view makes sense. Even so, these stocks should continue to grind higher, at least until energy traders take a long look at new supply metrics in 2017.
The oil services group has lagged other energy sectors by a wide margin since the first quarter bottom, with a strong U.S. Dollar acting as a stiff headwind. It now has the potential to play catch-up, adding points at a more rapid pace than explorers, refiners or producers. That rotation could offer excellent trading profits but just one of these two stocks shows the characteristics needed to justify long side exposure.
Halliburton’s long term price history has carved a series of boom and bust cycles, with steep rallies and declines testing shareholders’ stomachs and timing skills. A multiyear rally ended at $55.38 in July 2008, giving way to a vertical plunge that dropped the stock to a 5-year low in the low teens in December. The subsequent recovery wave unfolded at the same trajectory as the prior downtrend, printing a V shaped pattern that completed a 100% retracement to the prior high in 2011.
That rally ended at range resistance, giving way to a proportional decline that found support near the .618 Fibonacci rally retracement in 2012. It returned to 2008 resistance two years later and broke out but added just 19-points into the July 2014 all-time high print at $74.33. Aggressive sellers then took control, dumping the stock through new support in the mid-$50s in a failed breakout before selling pressure eased at the 2012 swing low in the first quarter of 2016.
The bounce reached the May 2015 high near 50 in June, yielding nearly six months of consolidative action, ahead of this week’s high volume breakout. It will now test the 2015 failed breakout near 55, which is unlikely to yield quickly. However, new support between 48 and 50 should contain the downside and maintain pressure on resistance into early 2017. That predicts exposure taken in the upper 40s to low 50s will eventually reward longer term position trades.
Schlumberger has tracked a less volatile path than its rival in the last 20-years, but has often underperformed, balancing out the lower risk. It ended a 5-year uptrend at $114.84 in 2007 and built a broad double top pattern into an October 2008 breakdown that dropped price to a 3-year low at $35.05 in March 2009. The subsequent recovery wave stalled at the .786 Fibonacci selloff retracement level in April 2010, just ahead of the notorious flash crash.
It then eased into a trading range that stalled progress for more than two years, ahead of a 2014 breakout that reached 2007 resistance in July. Aggressive sellers emerged just 4-points above the prior high, triggering a sharp reversal and downtrend that failed the breakout. The downside unfolded in three brutal selling waves that finally ended at 2011 and 2012 range support in January 2016.
The recovery effort shows less power than Halliburton, lifting to the November 2015 high in April and dropping into a shallow channel that’s still trying to clear resistance, despite this week’s strong upside. This barrier closely aligns with the .386 selloff retracement level, with a breakout opening the door to a trip into the lower $90s. Accumulation-distribution readings signal caution, dropping to a 10-month low ahead of the OPEC news while its rival is coming off a 2-month low.
The Bottom Line
Two oil services giants have carved divergent patterns, with Halliburton setting off a series of buying signals while Schlumberger struggles to clear 16-month resistance. As a result, HAL should offer a more profitable position trade than SLB in the three to six month holding category.