PBR Stock Still Stands a Fighting Chance
This escalating trade war has taken the wind out of the sails of this market, and it is why the markets are currently on the defensive. Emerging markets have taken the brunt of the sell-off, and many foreign markets are currently sitting at multi-year lows.
This market turmoil has caused investors to seek shelter on the sidelines, which is why bonds have rallied and the dollar has taken flight. This continues to be a difficult market to navigate, so it shouldn’t be too surprising to see investors stepping aside.
There is a bright spot in this market. As the saying goes, “there is always a bull market somewhere.” This current bright spot is the energy sector, and it is being propelled by higher oil prices.
Oil has been on a relentless run this year and is currently making multi-month highs. Accomplishing this feat in these treacherous market conditions, while the dollar is acting as a headwind, is a sign of inherent strength. This inherent strength is why I believe this sector is likely to outperform going forward.
In light of these events, I am returning to focus on Petróleo Brasileiro S.A. (NYSE:PBR) stock, more commonly known as Petrobras stock. In my last report titled “Petrobras Stock Is Primed for a Sustained Move Toward Higher Prices,” I outlined the technical indications suggesting that higher prices were likely to follow.
In quick order, higher prices did follow, and Petrobras tacked on 13.55% in a matter of five days. Unfortunately, that is where that move ended, because a violent correction quickly followed.
This correction was initiated by a nationwide truckers’ strike in Brazil, which was spurred on by the rising cost of energy prices. In the days that followed, PBR stock fell by 47.5%, which is a significant drop from the highs that were set a few weeks back.
I am returning to focus on Petrobras stock because I have reason to believe that the sell-off that just gripped this stock was constructive in nature. Therefore, I have reason to believe that Petrobras stock still has a fighting chance to regain its footing at its current level and stage an advance.
The reason why I believe that PBR stock can regain its footing at current levels is because it is currently testing two coinciding levels of price support.
These levels of price support are illustrated on the following Petrobras stock chart.
Chart courtesy of StockCharts.com
This stock chart illustrates that the coinciding metrics currently being tested were created by a downtrend line and the 200-week moving average.
The downtrend line highlighted on the PBR stock chart was created by connecting the peaks that were produced by the price action.
Since 2008, the price action on the stock chart was characterized by a progressive move toward lower prices, which consisted of a series of lower highs and lower lows. These lower highs and lower lows are the quintessential characteristics that define a bearish trend, and the downtrend line pinpoints where price resistance resided.
The downtrend line provides important information because in order to negate the bearish implications suggested by the bearish trend, PBR stock needed to break above it.
This was no easy feat because this downtrend line contained Petrobras stock and prevented it from advancing for almost 10 years. This all changed in December 2017, when PBR stock finally broke above it, implying that the bearish trend had finally come to an end.
Breaking above the downtrend line coincided with a break above the 200-week moving average.
The 200-week moving average, like the 200-day moving average, acts as a dividing line that separates bullish stocks from bearish ones. Breaking above this moving average implied that Petrobras stock went from a bearish stance to a bullish one. This reinforces the implications suggested by the breakout above the downtrend line.
Six months later, Petrobras is sitting above both these metrics and is testing them from above. Testing a previous level of price resistance from above is known as a backtest. Backtests serve to reaffirm that the original break above resistance was legitimate, while simultaneously establishing these metrics as a new level of price support.
Backtests act like springboards, and if this one is going to be successful, then higher Petrobras stock prices need to follow. This is why it is imperative that PBR stock maintains its footing above the coinciding metrics it is currently testing.
Petrobras stock is currently testing two coinciding levels of price support, and in order to maintain its bullish posturing, PBR stock must sustain itself above these metrics.