Marathon Oil (NYSE: MRO) appeared on the daily bearish scan the other night and after a deeper look into the stock, I became more intrigued by the bearish signal. The stock has rallied nicely since the beginning of February and that has caused both the slow stochastic and RSI readings to hit overbought levels. Normally a simple overbought reading isn’t enough to warrant my attention, but when I looked at the two oscillators for MRO and saw that both had not been in overbought territory since last November—right before the stock dropped over 17%.
One of the things I always do when analyzing a stock is look at multiple charts. I usually start with the daily and then move to the weekly and monthly charts. The reason for this becomes more apparent when you look at the weekly chart of Marathon Oil stock. Had I just looked at the daily chart, I might have missed a possible pattern development on the weekly chart.
MRO could be forming a head and shoulders pattern. The left shoulder is right around the $37 mark and formed back in June of last year (just out of the time frame on the daily chart). Marathon Oil stock dropped down to the $32 level for the first trip to the neckline and then bounced up to $38 to form the head. The dip from November to February created the second trip to the neckline and now the stock is back up near the $37 area to potentially form the right shoulder. Had I just looked at the daily chart, I would have missed this development.
It is also worth noting that the weekly stochastic readings are in overbought territory and look like they could perform a bearish crossover either this week or next. If you look at the crossover in November, you can see how the selloff developed. This pattern along with the pattern from the daily oscillators and the possible head and shoulders pattern give us three negative probabilities for MRO.
The sentiment toward MRO is over the top bullish right now which also plays into a bearish forecast. The short-interest ratio is a paltry 1.9 and the put/call ratio dropped sharply after the April options expired and is now the lowest it has been in the past year. The analyst ratings show 26 followers with 18 “buy” ratings and eight “hold” ratings. The overall sentiment composite using my proprietary system is 5.03. I consider anything over 10 to be a bullish reading and anything under 7.0 to be a bearish sign.
MRO will announce earnings on May 6, so that gives the stock a few weeks to move before the earnings announcement. Over the past year, MRO has missed earnings estimates twice and beat twice, so there isn’t a pattern there.
I would look to short MRO and try to get a decent gain in the next two weeks. If that takes place I would look to close part of the trade before the earnings announcement or at least put a pretty tight stop on the trade.
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