Todays Big Stock: Transocean LTD (NYSE:RIG)

Last week I wrote an article in regards to the potential trading opportunities for the oil stocks SLB (Schlumberger) and CXO (Concho Resources). Another oil stock that has caught my eye is RIG (Transocean). So, let’s take a look at the 1-year chart of RIG (Transocean) below with my added notations:

RIG has created a common reversal pattern known as a Head and Shoulders (H&S). This type of price action typically occurs after an up trend and signals a potential reversal. Confirmation of this pattern, and the sign that the trend reversal may have started, would be a break of support (neckline) at $75. As you can see, RIG has broken that support, thus should be moving lower.

Another piece of information that can be garnered from price patterns is their price projections. Simply take the height of the overall pattern, in this case $10, and subtract that amount from the breakdown point of $75. This gives you a minimum price target of $65. Obviously, this isn’t a guaranteed forecast, but it does commonly materialize.

The Tale of the Tape: RIG is a stock in the oil services industry that has recently broken support and confirmed its H&S formation. Because of this, RIG should fall to a minimum of $65. A higher risk short position could be entered now, or a lower risk short position entered on a rally back up to $75, if that occurs. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!

Good luck!

Christian Tharp, CMT