Todays Big Stock: Cobalt International Energy, In (NYSE: CIE)

Cobalt International Energy, Inc. is an independent, oil-focused exploration and production company with a salt prospect inventory in the deepwater of the United States Gulf of Mexico and offshore Angola and Gabon in West Africa. Cobalt has a portfolio of 132 identified prospects, consisting of 47 prospects located in the deepwater United States Gulf of Mexico and 85 prospects located in offshore Angola and Gabon. In addition, it acquired a 40% working interest and indicated as operator of Block 20 offshore Angola, on which it had 37 prospects. At the end of 2010, Cobalt had two drilling rigs under contract: the Ensco 8503 drilling rig and the Diamond Offshore Ocean Confidence drilling rig. Cobalt also drilled as operator two exploratory wells and participated as non-operator in three exploratory wells and one appraisal well.

To review Cobalt’s stock, please take a look at the 1-year chart of CIE (Cobalt International Energy, Inc.) below with my added notations:

After breaking drastically lower in August, CIE has moved into a sideways, consolidation pattern know as a Rectangle. This type of pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. The nice thing about a Rectangle pattern is that it will provide you trading points of support and resistance, as well as giving clearly defined breakout and breakdown points. For CIE, the Rectangle pattern formed an $11 resistance (red) and a $9 support (green). 

Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the Rectangle pattern for CIE is $2 high ($11 – $9), CIE should climb to a minimum of $13 ($11 + $2) if it breaks above $11 or fall to $7 ($9 – $2) if the stock breaks below the $9 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.

The Tale of the Tape: CIE has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. The possible long positions on CIE would be either on a pullback to $9, or on a breakout above $11. The short opportunities would be at either $11 or on a breakdown below $9. As always, regardless of entry, stop losses should be utilized.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

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