Earlier this month, OPEC+ announced production cuts that took the market by surprise… And put a rocket under the oil price.

Oil stocks, like market giant Exxon Mobil Corp (XOM) gapped higher as the market digested the news.

But with the U.S. economy showing signs of slowing – meaning less demand for gasoline – the question now is whether the boost in the oil price will be short-lived.

So today, we’ll take a dive into XOM to see how all the action might play out…

Filling the Gap

On the chart below, you can see XOM’s uptrend through 2022.

XOM made a series of higher highs and higher lows, as the longer-term Moving Average (MA, blue line) steadily climbed throughout the year…

Exxon Mobil Corp (XOM)

Source: eSignal

As you can see, that rally carried over into 2023.

By the time XOM peaked at its all-time high on February 10 ($119.63), it was trading at around four times its March 2020 lows ($30.11).

But after a promising start this year, XOM’s rally petered out. As buying momentum dwindled, XOM rolled over and headed down.

That fall coincided with two bearish technical signals…

1. The Relative Strength Index (RSI) steadily tracked lower. Then, XOM’s fall accelerated when the RSI fell through support (green line).

2. The 10-day MA (red line) crossed below the 50-day MA and started to accelerate lower.

But after the RSI made a ‘V’ and rallied strongly out of oversold territory (lower grey dashed line), XOM reversed and gapped higher around mid-March.

Take another look at the chart…

Exxon Mobil Corp (XOM)

Source: eSignal

When you see a gap like this, typically the market will come back to “fill it in.” That’s the market’s way of testing whether there is any substance behind the move.

In this case, as more sellers took advantage of XOM’s higher price (thereby pushing the price lower), buyers returned and pushed XOM higher again.

Soon after, XOM gapped a second time after news broke out of OPEC+’s production cuts.

Interestingly, you can see that XOM’s strong rally occurred well before those cuts were announced.

However, this higher surge now has the 10-day MA closing in fast on the 50-day MA. And the RSI is now tracking closely to overbought territory (red circle).

So, how do we play XOM from here?

Two Potential Scenarios Playing Out

Notice how XOM initially traded in a tight band after gapping from the OPEC+ news…

Up to that point, there was an even battle between the buyers and sellers. So, what happens from here will be determined by buyer or seller momentum.

If the RSI continues to rise, XOM could push up to new all-time highs. And the 10-day MA crossing back above the 50-day MA could see XOM trade above $120.

However, this action would also push the RSI into overbought territory.

If the November pattern (orange lines) repeats, a steadily declining RSI could see XOM top out and eventually roll over.

But there’s another pattern we need to watch out for…

If the RSI instead peters out and drifts lower, it could soon test support (green line). A move like that would see XOM fall again and “fill in the gap.”

In this case, if the RSI holds support and rallies after that gap has filled, then XOM could set itself for another move higher.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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