ExxonMobil: Opportunity Is Knocking – Should You Answer?

Summary:

• XOM returned a net -6% over the last year, compared to a +22% gain for the S&P.
• Our analysis of sentiment suggests that XOM may be in the beginning stages of a much larger rally.
• Using a system like Fibonacci Pinball with XOM and other names can help traders and investors define risk and potential gains.

By Levi at StockWaves; Produced with Avi Gilburt

We wrote about ExxonMobil (NYSE:XOM) at this same time a year ago (see here). The entire energy sector had been on a torrid tear since finding a major low back in the Fall of 2020. Many times, after such a sharp ascent, the price will correct via duration rather than a rapid reversal. That seems to have been the case with the energy sector and XOM in particular.

At the time of publication back on January 10th, 2023, XOM was expected to continue a corrective pattern, but not by means of a deep drop-off. It would appear that reality has met our expectations, as the price did fall some a net -9 to -10% since that time. Now, remember there was approximately a +4% dividend paid during the same period. So, the total return for XOM during that twelve-month time was -6% while the S&P Index returned +22%. That was a great time to allow the energy sector to lie fallow as we await the next harvest. Where does this leave us now?

We have been focusing on key names across the energy sector and have shared specific setups with our members. One of these current setups is XOM. Along with XOM, we will also comment on CVX. First, let’s listen in as Lyn Alden shares the fundamental viewpoint for both companies.

Fundamentals With Lyn Alden

“When constructing a portfolio, I don’t have any high conviction view about the difference between XOM and CVX. They are both so large and liquid that there isn’t likely to be any material market inefficiency between them, so to the extent that they are mispriced in any way it’s likely because the energy sector as a whole is mispriced.

Both have an S&P AA- credit rating, both are in the process of making major acquisitions, both companies have very similar revenue fluctuations, and both trade for nearly identical price-to-cash-flow and EV/EBITDA ratios (see attached charts).

Owning both XOM and CVX, if one is bullish on the energy sector as a whole, gives similar overall upside but spreads the idiosyncratic downside risk among more projects.” – Lyn Alden

The Picture As Painted By Sentiment

Please keep in mind that our methodology does indeed combine what we will term Fundamentals with Technicals. However, what some may call ‘technicals’ really is sentiment. Let’s look at the picture painted first and then we can delve just a bit deeper into the why of the methods used.

You can see on both of these recent charts shared that we are viewing the energy sector, and these two charts in particular, as having found their Intermediate [4]th wave lows. Yes, it is plausible for them to see a bit lower in their respective fourths. But, at the moment, we are viewing the probabilities as higher that wave [4] is already in place.

The intermediate wave [5] should carry the price to highs well above those struck some three times in the $120 region for XOM. As always, we will continually update our expectations, as well as adjust the risk vs potential reward as the structure of price fills out the chart.

For now, as long as the price remains above the low struck in XOM at the $98 region, we are anticipating further upside in the near term and that we may have even already seen an initial micro 5 waves up and a 3 wave correction since those lows.

This means that the next move higher may travel to the $110 region. Should the price instead seek new lows, then major support is at the $90 – $92 level and then $83 – $84 below there. Under $83 would begin to alter our near-term bullish outlook for XOM.

What Is Sentiment?

There are several ways we can explain the same word. Mood, feeling, disposition. But it basically boils down to fear and greed. Those two ‘feelings’ dominate how the price action unfolds before our very eyes on the charts that we study.

Avi Gilburt shares his own studies on the subject to the readership here on a regular basis. These are findings over years of investigation, trial, refinement, observation and then continual proof manifested in chart after chart.

Here is a brief excerpt from the 6-part series that Avi published to explain our methodology more fully. You can see this article, part 4 of the series, here.

“A move in the direction of the trend is considered a ‘motive’ move (or, as I often refer to it as an ‘impulsive move’) and will constitute 5 waves in the primary trend direction. A counter-trend move is considered a ‘corrective’ move and constitutes 3 waves, which are counter to the primary trend direction.

Within the impulsive 5-wave move, waves 1, 3, and 5 move in the direction of the primary trend, and waves 2 and 4 will be counter-trends in the opposite direction.

Since the market is ‘fractal’ in nature, it means that these movements are variably self-similar at different degrees of trend. In other words, these impulsive and corrective movements of the market are occurring at all degrees and in all time frames. That means that the smaller components, or sub-waves, have the same basic shape, form, and pattern as the larger components. So, waves 1, 3, and 5 all have to develop as 5-wave structures.

While this may have begun to sound more complex, I do want to note that the main rules of Elliott Wave analysis are really quite simple. First, wave 2 can never retrace beyond the start of wave 1. Second, wave 3 cannot be the shortest wave. In its simplest form, these are the main rules which you cannot break for a valid Elliott Wave structure. The rest of the analysis is based upon guidelines. And, yes, there are too many to list here.” – Avi Gilburt

Now, Let’s Apply This To XOM

We are anticipating XOM to be in the beginning stages of an Intermediate [5]th wave rally structure. This means that if wave [4] is indeed in place as assumed, then the price should advance from here up to our higher targets overhead. First to $110 and then $125, this just being the initial leg of this [5]th wave.

Do You Have A System In Place?

Those who have experience forged by time in the markets will tell you that it’s imperative to have a system of sorts in place. You need to be able to define how much you are willing to risk vs. how much gain is likely. Those who survive across the decades in the greatest game on earth will also inform you that the preservation of capital is paramount.

While there are multiple manners of doing this, we have found Fibonacci Pinball to be a tool of immense utility for traders and investors alike.

Conclusion

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CVX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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