CXO in Bull Channel But Weakness Abounds

With oil rebounding off the major lows that characterized 2015, the exploration and drilling industry began to recover in early 2016 and enjoyed a slow but steady uptrend  for much of the year.  One such exploration company that continues to trade in a bullish channel is Concho Resources, Inc. (NYSE: CXO).  Concho's area of focus is the Permian Basin in West Texas and Southeast New Mexico, a region that should benefit from any relaxation of environmental controls that currently add pressures to the bottom line and inhibit growth in the industry as a whole.

Overall, the industry experienced a rapid price appreciation in the first half of last year, however, that positive rate of change diminished as oil prices stabilized later in the year.  The result, especially in the case of Concho Resources, is an oscillating price pattern in a bullish channel at a gradual but healthy slope.

CXO Daily Chart

There are warning signs, however, that the channel's strength may be waning.  For all of 2017, price was riding the support line of the channel.  The various bullish candles in the last couple of weeks are starting to look more and more like testing patterns leading into a distribution phase and subsequent downtrend.

On Balance Volume turned down off the highs and continues to slope down.  This is another indication that demand has waned and supply is starting to enter the equation.  Finally, the RSI(9) Oscillator transitioned from a bullish divergence (shown in black trend lines) to a bearish divergence (shown in red trend lines.)  The daily picture cautions that the uptrend may be weakening to the point of breaking to the downside.  If so, expect those two green support lines in the channel to quickly transition into resistance lines.

The weekly chart does nothing to change our view that the trend is on the cusp of change.

CXO Weekly Chart

As we might expect based on the overall pressures in the energy sector, CXO spent the last several years in a long-term correction.  The monthly chart suggests the correction may have ended in January, 2016, but we don't yet have sufficient evidence to reach that conclusion.

Starting with that late January 2016 low, a 5-wave impulse pattern ran its natural course, ending in early December, 2016.  Notice that Wave 5 was an extended wave that included two deep corrections.  The pattern now is in Wave-A of the corrective pattern coming off that 5-wave impulse.  Now, if this is a new impulse on the monthly chart, then that Wave-5 top is also Wave-I on the higher order, however we cannot yet state that as fact.

Just like the daily chart, the weekly uptrend formed a bullish channel that continues to hold price along the support line.  Weakness in the recent pattern coupled with the completion of Wave-A strongly cautions us that the channel could be broken to the downside.

Long-term traders will notice the double top pattern that set up with the Wave-5 completion.  Now, this pattern has yet to confirm since that requires a break of the neckline.  I draw that neckline as being horizontal from the first low, however be aware that there are other possible interpretations that would lower that neckline by at least 5-points.

The next warning sign comes from the RSI(9) oscillator.  A bearish divergence started to manifest with the completion of Wave-3.i.  Since then, the RSI showed continued weakness while the price action experienced a series of higher highs and higher lows.  This weakness would be consistent with the corrective wave pattern we anticipate following the Wave-5 top.

Finally, OBV is flattening and may actually be starting to hook down.  The bearishness of this volume indicator is more prominent on the daily chart, but even here on the weekly we're seeing evidence that distribution may be entering the scene.

This brings us to our view on how we may be playing this setup.  Given all the weakness, I'm hard-pressed to consider a long position, despite the positioning of price on the support line in a bullish channel.  That would change, of course, if we see a strong bullish candle with confirming volume, however that's not the move we expect from this position.  Rather, we're watching for a break of the support line to the downside on confirming volume.  If we get that break, we'll look to enter short on a retest and rejection of that former support line as it transitions into resistance.

We will also be watching for the development of the A-B-C corrective wave.  Wave-A looks to be in progress, so the retrace for Wave-B should give us a clue as to the type corrective pattern this will be and will tell us how to play Wave-C.  It's that Wave-C move that we'd really like to catch if we can read the entry in time.  Watch for that signal since an entry in the area around $145 could move close to 20-points on the downside if the pattern follows a traditional zig-zag correction.

Happy Trading.