Saturday, December 24, 2016

Schlumberger Stuggling Near 52-Week Resistance

Following their 52-week low on 20 January 2016, Schlumberger Ltd. (NYSE: SLB) labored in fits and starts to finally reach a 52-week peak on 1 December.  For the rest of the month, however, the energy giant repeatedly tested the highs only to be beaten back with bearish long-wick candles.

SLB Daily Chart
Multiple signals on the daily chart suggest that a breakout one way or the other is imminent.  At first glance, the pattern is somewhat encouraging.  The short-term pattern from 30 November draws a distinct bullish diagonal support line matching the 10-day Exponential Moving Average.  SLB traced daily lows along that trendline at least eight times in the past three weeks, yet the trendline has held throughout.  That, certainly, is a bullish signal.

The counterpoint, however, is at the top of that pattern.  That trendline originates at a 10 October 2016 top and with four distinct touches.  It was only penetrated briefly on one occasion. The two trendlines together form a rising wedge. Still slightly bullish, but short term at best.

Volume starts to paint a troubling picture, however.  The highest volume in the last three quarters comes on a very bearish shooting star candle on 1 December.  That combination is representative of a buying climax, potentially signalling the end of this uptrend.  Indeed, the next two high volume days, although technically up days, are also very bearish signals.  Since the first test of the 52-week high on 12 December, volume has declined consistently.  There's little to no demand entering the trading scene through a second test of the high on 22 December.

Now look at the three peaks of 18 August, 19 October, and 30 November.  How's that for a perfect triple top setup?  That SLB traded a mere 3% above the high of the triple top while volume continued to decline is yet another bearish signal.  It's easy to interpret this pattern as a sign that the smart money is gradually distributing their shares in preparation for a significant decline.  How significant?  Well, the target would be an 8-point decline from the break of the upward sloping neckline drawn along the pattern bottoms.  That's a full 7 points from where SLB is trading today and would represent a healthy correction.  Given the negative view SLB took of the energy outlook through 2016, such a correction is not out of the question.

Finally, look at the RSI(9) pattern.  From the 2 November pattern low to the 23 December close, the RSI drew a consistent bull channel that matched the price pattern channel drawn by the stock.  The tests of the 52-week high, however, form a bearish divergence in the RSI indicating increasing weakness.  Just as price sits on an upward sloping support line, so too does the RSI.  Watch for a confirming break in both price and RSI to signal the start of a potentially significant decline.

Certainly a solid break on confirming volume above the 52-week high would create a long trade setup, and we would not skip that if it occurs.  The likely move, given the signals on the chart, are two the downside, however, and for that setup we're watching for a southerly break of the upward sloping support line, again with confirming volume.  We are prepared to play whichever trade sets up.

Happy Trading

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