TOPPLE THE RIG! Chevron Spilling Like the Exxon Valdez (CVX, ESI)

We’re close to exiting all our energy positions, but we couldn’t pass up taking one more bite of that black-sticky – this time from big crude behemoth Chevron Corp. (NYSE:CVX).

But before we get there, we have one to close.

Myrna… all that winking and she never got married.

It’s our ESI initiative, whose details can be dug up HERE.

In short, we’re holding a debit of $3.22, the August 19^th 20 synthetic short and one short August 19^th 22.50 CALL.

And…?

With ESI currently at $16.94 (and falling), our long 20 PUT can be offloaded for $3.10.  You may get more if markets open lower tomorrow, as we suspect they will.  But we’re booking it as such.

Leave the short 20 and 22.50 CALLs to wither.  The stock has little chance of retaking those levels, but we’ll be watching, and will inform you of any action that needs be taken.

Until then, call it a loss of $0.12.

That’s a minus 6.6% in the P&L.

And now we turn to our meat for the day.

Four of the largest players on Wall Street have downgraded CVX since mid-March.  Société Générale, RBC Capital Markets, Morgan Stanley and JP Morgan got out early – and correctly – before the oil spill of the last three weeks.

The chart, below, makes it clear.

But before we get there, a few fundamentals…

• To begin, CVX carries a P/E of 13.78, while Forward P/E is just 9.91, indicating stagnant prospects for the company, overall.
• Annual Yield is 3.88%, not bad at all for this market, and
• So, too, Price to Book, which currently stands at a relatively healthy 1.94.
• That said, earnings next year, according to consensus, are expected to decline by 13.28%.
• Moreover, insiders appear to have lost faith, selling a full 60% of their stake in the last six months for a whopping $294 million!  Can you digest that?  And all while oil prices were soaring and the stock was setting daily new highs.
• Perhaps more to the point, though, the selling stopped abruptly at the end of May, just days before the current decline began, and the stock dunked lower by some 23%.
• All told, an incredible $195 million was offloaded in May alone.

Kinda gives you the chills, no?

Like somebody knew in advance what was going down?

Anyway, before all those louts in cashmere have a chance to buy in again, there’s going to be another whirl of selling, as far as we can see.

And we’re going to do our utmost to cash-in in both directions.

Charting the Decline

Below is the daily chart for the last year, and it shows, among other things, just how fragile CVX’s current technical position is.

See here –

The breakdown’s like this –

1. First, RSI went overbought in April (circled, in red)
2. On massive volume (in purple), and
3. Since then, both RSI and MACD have diverged sharply against price (green arrows).  This is indicative of a loss of bullish momentum, and with both indicators now sub-waterline, the bears clearly hold the upper hand.
4. Price-wise, we had a roughly 100% gain since last September that’s now seeing a strong bout of profit-taking.
5. The trend-lines we’ve drawn (in red) have been broken one after the next, each time leading to a steeper fall.  A third trendline now remains to be sundered at the 147 level.
6. And with a two-week pennant forming (in blue), we expect a sharp decline to ensue from #3 (in black) in the days ahead.  Pennants are continuation patterns, so it follows that we should see a break, potentially as far as the rising 274 DMA now at 130.

But we don’t need that steep a decline to cash in on today’s 1328% return potential.

Nope.

Just a modest 4.4% pullback will do.

Check it out –

A Jew and His Money recommends you consider selling the CVX August 19^th 145/150 CALL spread* for a credit of $2.20 (9.05/6.85) and buying the CVX August 19^th 145/140 PUT spread** for $2.55 (8.40/5.85).  Total debit is $0.35.

[*Sell the 145 CALL and buy the 150 CALL.  **Buy the 145 PUT and sell the 140 PUT.]

Rationale: the trade affords us a chance at a 1328% return ($4.65) on just $0.35 expended.

Max loss is $5.35 (difference between the CALL strikes plus the initial debit).

Breakeven on the trade occurs at $144.65, just 1.2% below price.

And again, the whole offshore platform is delivered with a decline of just 4.4%.

Dig it.

.ברוך דיין האמת

We’d be remiss if we closed today without mentioning the following…

A Jew and His Money mourns the loss of a great Jew, Dr. Velvel Wolf Zeev Zelenko, for whose health we prayed in batei knesset and batei midrash around the world since the beginning of the phony Batflu revealed him to be among the fiercest warriors for truth in our day.

May his memory be blessed, may his courage and tenacity in the fight for emet v’tzedek and his good nature in the face of constant adversity always be remembered.

He worked tirelessly to reveal the face of the greatest evildoers and enemies of G-d ever to walk the earth.

May Hashem erase their names, and may we witness their demise speedily in our days.

Amen.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew