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You would be hard pressed to find a stock that investors are more bearish on than offshore driller Transocean (NYSE: RIG).
The company is showing a short interest ratio of 11.2, with over 118 million shares sold short. That is 32.5% of the float that is sold short. Analysts are extremely bearish as well, with only one “buy” rating compared to 12 “hold” ratings and 2o “sell” ratings.
Yes, Transocean stock has struggled over the last few years, and really it has been a struggle since the oil spike back in 2008. Transocean traded at an all-time high of $132.13 in May 2008. The recent low was $13.28 in March, meaning that the stock lost 90% of its value over the course of those seven years.
But I think the stock is rebounding. It may never get back up to the $132 level, but it could easily double over the next six months to a year.
Transocean announced earnings last night. It beat earnings estimates, but there were excluded items. Analysts expected the company to earn $0.60 per share, but the report showed earnings of $1.10. The revenue forecast was for $1.92 billion, which the company exceeded with revenue of $2.04 billion.
Looking at the daily chart, you can see that Transocean stock has made a small reversal over the course of the last few months, but it is approaching possible resistance at the $20 level and it is overbought based on the daily stochastic readings.
When you step back and look at the weekly chart, you see the potential move that it could make with very little resistance between the $20 level and the $34-$35 range. It is also encouraging that the stock has moved back above its 13-week moving average, as the trendline has acted as resistance in the past.
In order to give you a better picture of how important the $34-$35 range is, I expanded the chart to the last 7 ½ years. Because of the larger time frame, the details are a little hard to see, but look at how many times the stock found support in the aforementioned range.
My take toward Transocean is this: I can see the stock pulling back a little over the next few days, and that will take the daily chart out of overbought territory. I then see Transocean stock making another run at breaking through the $20 level, which I think it does this time around.
Once the stock breaks $20, the short sellers are going to rush in to try to cover their short positions, and that will drive the stock sharply higher – and it will happen quickly.
I would try to buy the stock this week and have some patience with the trade. As long as it stays above its 50-day moving average, I would be comfortable owning the stock. My target would obviously be the $34-$35 range, which is almost double where the stock is trading now.
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When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.