The Tug of War Between Oil Bulls and Bears

For the first half of 2023, Phillips 66 (PSX) traded in a tight sideways range.

Spun out of oil giant ConocoPhillips (COP) just over a decade ago, PSX supplies petroleum products to brands like Conoco and 76.

Yet even production cuts by OPEC in April and early June didn’t give any lasting momentum to PSX’s stock price.

Only in July did PSX’s current rally gain traction. PSX recently traded as much as 30% above its June low.

But buying momentum is already looking stretched.

So today I want to see what OPEC’s latest decision to extend production cuts could mean for PSX’s share price…

Lacking Conviction

On the chart below, PSX’s sideways pattern ran from December 2022 through mid-June this year.

As is common with this pattern, the 10-day moving average (MA, red line) crossed the longer-term 50-day MA (blue line) multiple times without a clear breakout in either direction.

Phillips 66 (PSX)

Source: eSignal

Throughout this period, the Relative Strength Index (RSI) regularly flipped between the upper and lower half of its range (above and below the green line) as well. That shows a lack of conviction from both buyers and sellers.

The RSI finally broke into its upper half in July and stayed there. That allowed PSX’s rally to really get underway.

That strong surge in momentum propelled PSX up to its peak last month (August 11). And it saw the 10-day MA cross and accelerate above the 50-day MA.

Then, after a brief pullback in mid-August, PSX rallied again, making a new higher high. This is the highest that PSX has traded since November 2019.

While PSX was making those higher highs (upper red line), though, the RSI was making lower highs from overbought territory (lower red line).

Take another look:

Phillips 66 (PSX)

Source: eSignal

Although there are no guarantees, when the stock price and RSI are heading in different directions, a change of direction is often in the cards. That’s because if buying momentum continually falls, it will eventually drag the stock price lower too (and vice versa).

This is now a tug-of-war game between the bulls (backed by OPEC recently extending production cuts) and the bears (declining momentum). So how will things play out from here?

Stocks that Overshoot

The most immediate thing I’m watching right now is the action of the RSI.

If it continues to track lower (making lower highs), then that makes it increasingly difficult for PSX to maintain its rally. If momentum continues to fall, then eventually PSX will roll over too.

But we’re not trying to predict PSX’s long-term trend from here. Instead, we’re looking for a stock that has overshot and could be due for a pullback.

That could hand us the setup for a potential trade.

The other thing I’ll be keeping a close watch on is our two MAs.

As you can see, after PSX reversed off its peak last month, the MAs started moving closer together. If this converging pattern continues, that will add further weight to any potential pullback.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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