A Possible Diamond in the Rough

Interactive Brokers’ Traders’ Insight

By Gary Christie

The Energy sector has been the best performing sector of the past week with the SPDR Energy select sector ETF (XLE) returning 3.6%. Oil equipment & services stocks have given the most help pushing the sector higher.

While drilling for oil stocks, our technical event screener has identified very strong bullish evidence for Diamond Offshore Drilling (DO). Our top-down analysis shows the stock is well aligned to the Energy sector and overall market direction relative to the S&P500. We have identified some bullish technical events happening now.

Momentum (Weekly chart): upward momentum has just built up with the latest price now trading higher than the price 10 bars ago.

Moving Average Convergence/Divergence (MACD) (Daily Chart): The MACD (Moving Average Convergence Divergence) plots the difference between a shorter-term (12-bar) and a longer-term (26-bar) exponential moving average (EMA). Bullish and bearish events are generated respectively as the MACD fluctuates above and below zero to indicate whether prices in the shorter term are stronger or weaker than the longer term average.

A 9-period EMA of the MACD is overlayed as a "signal line" which smooths out the MACD to provide a clearer view of whether it's moving upward or downward. A bullish event is generated when the MACD crosses above the signal line, showing that the current MACD is actually higher than its average, a sign of increasing strength for the price.

Commodity Channel Index (Daily Chart): The Commodity Channel Index (CCI) measures the deviation of the price from its average value (comparing to a chosen moving average, typically 20 bars). The oscillator is normalized by dividing by the typical deviation, so we get an oscillator fluctuating roughly between +100 and -100. Many traders use these as overbought (+100)/oversold (-100) markers and watch for signs of reversal, but original use was to consider long positions when CCI is above +100 (bullish event), and short when below -100 (bearish event). When the price crosses back in between +100 and -100, another event is triggered to indicate an end to the prior bullish or bearish situation and a possible opportunity to close out such a position. 

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