I am going to cut to the chase here. Based on Friday’s data, out of the 42 survivors of 20000 stocks and ETFs in my universe of screening, 8 of them were stocks involved in petroleum refining, exploration, pipeline development or field services (CLR, GPOR,NFX,PBF,SE,BHI,SU, and HAL), 9 were in emerging market ETFs, largely China based, (EEM, IEMG,EDC,AAXI,ASHR,EWS,FXI,MCHI, and PCY), and the rest were in a smatterng of mortage and real estate REITs.
One of the better recognized Chinese software firms (QIHU) also hit the list. KLIC was the only semiconductor name of note that made the screens.
When the value analysis was done, only two remained, NFX and KLIC. KLIC got booted from the neural net screens because it gapped down on Tuesday, May 4,2014. The nets typically don’t care for gaps on the downside, because of the high potential for a “gap and go” sort of reversal to lower prices. The momentum indicator AND volume did seem to provide some confidence of a reversal, but the trading statistics were less than impressive on a profit factor basis, even though 70% of the trades were profitable. What could be the problem with that, you might ask? The losing trades tended to be steep losses, and many came one after the other. KLIC does have some issues with consistent profitability over the last few years, so even with some accretive investmens in semiconductor technology and burning of cash for same (something they did in the past quarter), diluted growth in income is a bit flat to down from previous years.
The nets did indeed like NFX, and it is growing on an earnings basis at roughly 20 to 25% annually at the current time with a Price earnings ratio of roughly 15.1. The net cash flow enterprise value would be, at the close of Friday (36.44/share) could be (notice I did not say guaranteed to be or will be) in the high 50s per share in 2 years if these trends in earnings performance can continue. The nets show a profit factor of 1.6 and a win ratio of 61% (right on the border of accetptability), with an average win/loss ratio of 1.08 to 1, which is also acceptible. Volume was just over the threshold in terms of the 50-day simple moving average of volume.
Check out these charts for targets and supports. Note that principle support is based both on price lows and very near Fibonacci retracement support. Initial price resistance is based on previous support. That resistance is based on the line above Friday’s upward reversal swing.
What you have as of now is a chart that has reversed on decent (but not overwhelmingly great volume) which is very close to target at the 0.382 retracement level of the previous downswing at roughly 36.90. The statistics are passable to take a position here. But lets look at what might happen as that 0.382 retracement or the 0.618 retracement which is at approximately 38.22. What could happen from those two levels? Check this chart out:
Note that price support on this chart is only congruent with one major Fibonacci level on this chart (at the 0.786 retracement). It also happens that there is price symmetry between the blood red line (which is the C to D leg of that AB = CD zigzag pattern), and the bright red segment ( the A to B leg) which occurred after the momentum high. Statistically, based on research I have run over the years on these patterns, it is at least 50% (meaning more likely than not), that there will be price support found there, and that this pattern will become an AB=CD bullish buy point at some time in the future.
If I were conservative, I would wait for that pattern (the AB=CD) pattern, to complete, and the take a position long taking a price perhaps 2 cents lower than the momentum low that is the X point (which culminates with the “A” high that precedes that projected AB=CD style rally correction. If I were aggressive, I would start a very small position, take profit at the 0.382 retracement level, and then allow the 32.12 level to be tested for a future entry (which I will be able to monitor ).
What are the potential risks to this long trade set up? If anything, it is likely going to be the price of natural gas. Since it appears that the United States is locked in a low natural gas pricing environment (and a minor glut of shorts in term sf available supply), it may be more difficult for Newfield Exploration (NFX) to get the easiest extractable gas, as this company does not have exposure to the plentiful reserves in the Bakken fields. The company, for that reason, is wisely ( at least so far) shifting its emphasis on petroleum liquids, where it has ample places to explore and produce. That transition can be fraught with bottlenecks, some of which were indicated in this quarters (Fiscal Q1 2015’s) quarterly loss. It was anticipated that the company would earn $0.10/share. Instead, this past quarter, NFX only earned $0.03/share, which was a major disappointment. NFX has a decent track record of success in development and production over time, however. The stock though, could be highly volatile (as to some degree or another petroleum prices have been in the last 10 years). The swing trade long is only meant for 5 to 15 trading days, so it is not a long-term or intermediate-term set up by any means.
PAST SWING TRADE: Remember CFG? Well, as you can see, it has hit is outer target now. 26.40 was effectively taken out. It did take a little longer than 5 to 15 trading days, but that is an estimate. With volatile, toppy markets like we have at the moment, it could take longer to happen than this.
Is what I suggest that a new boom in gas related production stocks is at hand. NO. I do think that consolidation in this industry is possible, and that the growers can outperform the non-growers. NFX has inherent risk of lack of performance on a price basis, but we will simply have to watch it and find out what happens.
That is all for now, to get this to the presses on time. Thanks for supporting this blog!