Petrobras Stock Is Primed for a Sustained Move Toward Higher Prices

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PBR Stock: A Bullish Trend in Its Infancy

The first quarter for the market indices was not a good one by any stretch of the imagination, but that does not mean there were not sectors that were thriving.

One sector that performed exceptionally well in the first quarter of this year was energy stocks. My readers are probably well aware that I have been focusing on a number of companies that fall within this sector.

The strength in this sector has carried through into the second quarter, and 2018 seems likely to be the year when energy stocks are set to outperform the indices by a wide margin.

Appropriately, I am focusing on PETROLEO BRASIL/ADR (NYSE:PBR) stock, which is an energy play. But the main reason why I am focusing on Petrobras stock is that it has just completed a technical price pattern which is suggesting that further gains are on the horizon.

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This completed technical price pattern is highlighted on the following stock chart.

Chart courtesy of StockCharts.com

The completed technical price pattern highlighted on the above PBR stock chart is a descending channel.

A descending channel is a price pattern characterized by price action that contains a series of lower highs and lower lows. This sequence creates the quintessential characteristic that defines a bearish trend.

The parameters defining this bearish trend were created by connecting the series of lower highs and the series of lower lows, creating two parallel downward-sloping trend lines. These trend lines define significant levels of price resistance and price support.

As long as Petrobras stock was contained within these trend lines, the bearish trend was set to continue.

In order to negate the implications suggested by this pattern, the stock needed to break above resistance, which is exactly what occurred on May 9. This breakout is suggesting that higher stock prices are likely to follow.

This notion of higher PBR stock prices is magnified when the completed pattern is combined with the price action that preceded it. This combination creates a wave structure, which is highlighted on the following chart.

Chart courtesy of StockCharts.com

This Petrobras stock chart illustrates the wave structure that the descending channel was instrumentally part of.

This wave structure is made up of impulse waves and consolidation waves. It has been responsible for taking PBR stock from a low of $7.64 in July 2017 to where it currently stands at $15.13.

The impulse waves within this wave structure capture the stage in a bullish trend when a stock sustains a progressive move toward higher prices. The consolidation waves within this structure capture the stage in a bullish trend when a stock corrects and refrains from advancing.

These waves feed off each other, creating the quintessential characteristic that defines all bullish trends: a sequence of higher highs and higher lows.

The completion of the descending channel is suggesting that an impulse wave is now in development and that the sequence of higher highs is set to continue.

The following Petrobras stock chart illustrates that this bullish trend is only in its infancy, implying the potential for much higher stock prices.

Chart courtesy of StockCharts.com

This stock chart illustrates that, after PBR stock peaked in 2008, the stock price was characterized by a progressive move toward lower prices. This price action, clearly shown by the series of lower highs and lower lows, defines a bearish trend.

The downtrend line highlighted on the stock chart was created by connecting this series of lower highs, and it pinpointed where price resistance resided. This downtrend line contained Petrobras stock and prevented it from advancing for almost 10 years.

While PBR stock was trading below this downtrend line, the moving average convergence/divergence (MACD) indicator was also in bearish alignment.

MACD is a simple yet influential indicator that uses the crossing of a signal line to distinguish whether bullish or bearish momentum is driving the price action in a stock. Bullish momentum implies that a stock is geared toward higher prices, while bearish momentum implies that a stock is geared toward lower prices.

The key takeaway from the MACD indicator is that a stock cannot produce a sustained move in either direction unless the applicable momentum is supporting it.

The signals generated on the PBR stock chart are a testament to this notion because the entire time that the bearish trend was in development, the MACD indicator was in bearish alignment.

It was not until after a bullish MACD signal was generated that Petrobras stock was able to sustain an advance and finally break above the downtrend line.

This break above resistance, combined with the bullish MACD signal, is implying that the bearish trend has finally run its course, opening the door for a sustained move toward higher prices.

Analyst Take

I have outlined a number of technical indicators that were generated on the Petrobras stock chart that both suggest and reinforce the notion that PBR stock has begun a sustained move toward higher prices.