Chart Of The Day: Occidental Petroleum May Be Worth A Short

Legendary value investor Warren Buffet has been buying Occidental (NYSE:OXY) shares and now has a 17.4% stake. His reasoning is that the stock is fundamentally undervalued despite it posting one of the best returns in H1 2022 while the broader market tumbled.

Buffet is renowned for saying that when you buy a stock, pretend that the stock market will shut down for 10 years. So, he is clearly investing for the long term.

But we think Occidental shares may trade lower, so investors who don't want to wait a decade to see a return may want to wait before buying the stock.

Short-sellers could also profit now by trading a stock that has almost doubled since the start of the year.

While this performance is a testament to Occidental's resilience, it is contingent on the oil price, which has climbed to its highest level since 2008 and that rally may reverse.

Oil Daily

Oil may be forming a Rising Flag, bearish after the preceding decline, primarily as it tests the uptrend line since the December low, whose technical significance is confirmed by the 200 DMAs. A downside breakout would test the April low, completing a peak and trough downtrend.

According to the longer downtrend line, the RSI fell below its uptrend line. The MACD's short and long MAs conflict at the same level as the indicator's previous low, demonstrating a potential catalyst, like the convergence of the April low and the 200 DMA.

Now, let's examine the Occidental chart.

OXY Daily

If the price falls below $55, it will complete an H&S top. Note that the left shoulder is longer. So, if such dynamics are dominating the trading, the pattern could extend another while. I drew the dotted lines above to demonstrate the same resistance prevailing and where to look to see if the price remains below those levels.

The MACD and the RSI provide negative divergences to the slightly rising price, demonstrating that both momentum and average price comparisons are weakening.

Trading strategies

Conservative traders should wait for the price to fall below $53 and for the price not to rebound back above the neckline for three sessions, preferably including a weekend, before risking a short position.

Moderate traders could short if the price falls below $54 and does not cross back above the neckline for two days.

Aggressive traders can short according to a plan that incorporates their timing, budget, and temperament. Here is an example:

Trade Sample - Aggressive Short

• Entry: $63
• Stop-Loss: $64
• Risk: $1
• Target: $60
• Reward: $3
• Risk-Reward Ratio: 1:3