After hitting 13-year lows back in February, oil prices doubled from $26/bbl to nearly $52/bbl by the first couple of weeks of June. The oil rally drove turnarounds in oil services stocks like Schlumberger Limited. (NYSE: SLB).
Schlumberger’s stock is up 9.3% since Feb. 14, but it has severely lagged the gains of WTI crude oil in that time. With very few analysts predicting significant upside to oil prices in the near-term, is Schlumberger’s stock now at risk of a sell-off?
One look at Schlumberger’s chart shows that a much more bullish development has been happening in the past seven months. While it’s true that Schlumberger has failed to break above $81 resistance on three separate occasions since late 2015, it’s increasingly higher support levels are very encouraging.
The technical pattern formed when a stock has both a horizontal resistance line and an upward-sloping support line is called an ascending triangle. The ascending triangle is a very bullish formation and can signal a reversal following a long-term downtrend like the one that Schlumberger has endured in recent years.
The pattern indicates market accumulation. The idea behind the formation is that buyers are unwilling to pay more than $81 for Schlumberger in the near-term, but sellers are increasingly unwilling to sell the stock at lower prices. If the pattern continues to hold, the stock will trade in an increasingly narrow range until the support and resistance lines converge at $81 forming a triangle.
The two levels to watch for Schlumberger traders in the near term are the support line at around $72.40 and the resistance line at $81. Until the stock breaks outside of one of those two lines, the ascending triangle is still in play.
A breakout above $81 likely means that Schlumberger will make a run at the $92 level that served as the stock’s 2015 high.
In the longer term, the price projection following an ascending triangle breakout is typically equal in magnitude to the widest part of the triangle itself. In Schlumberger’s case, that width is roughly $22.60, meaning the new longer-term target would be around $104.
Below $72.40, the next potential support level is May’s low of around $71.50.
If Schlumberger does eventually record its bullish ascending triangle breakout above $81, traders will be looking for confirmation that the move is for real. High volume typically accompanies big technical breakouts. In addition, after a true breakout, the $81 resistance line will turn into a support level for the stock, and any pullback to the $81 level should hold.
Disclosure: the author is long SLB.
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