Techie Tuesdays: Exxon Mobil

Welcome to Technical Tuesdays!!! 

Everyone is familiar with Big Oil, so I decided to kick off Techie Tuesdays with Exxon Mobil.  Exxon Mobil has been the focus of much media attention for their record profits but, does that mean you should buy the stock?

Today, I will use the simple moving average to evaluate Exxon Mobil.  The moving average is the average closing price of a stock over a set number of days. You can calculate the moving average for any number of days, most people calculate it somewhere between 5 and 200 days.  Each point on the moving average line represents several days worth of activity.  The more days you use for your calculation, the smoother your lines will become, making any long-term trend easier to identify.  The chart below shows Exxon Mobil’s daily closing prices plotted with the 5 and 200-day moving averages.

Here’s what the formula looks like: The 5-day moving average as of 10/17/08 = The sum of the closing prices from 10/13, 10/14, 10/15, 10/16 and 10/17 divided by 5.

The most basic version of using the moving average suggests that you buy a stock when the current price is above a long-period moving average.  Anything else, signals a sell.

A slightly more complicated version of the moving average rule says buy the stock if the current price of the stock is above the moving average AND the moving average is sloping upward.  Sell the stock if the current price of the stock is below the moving average AND the moving average is sloping downward.  To some, these rules seem counterintuitive, but here’s the rationale: if the moving average is sloping upward and the current price is higher, the current price is continuing the long-term trend’s upward momentum.  So, you may not be buying low and selling high but you are jumping in with hopes that the upward swing will continue.

So, what to do with XOM?  My analysis uses just one year’s worth of data and the 10/17 closing price for XOM of $68.04.  The 5-day moving average on 10/17 was $69.08, the 200-day moving average as of 10/17 was $83.85.  So, in both cases the most recent closing price is lower than the moving average.  The 5-day moving average is sloping downward and the 200-day moving average appears to have taken a turn for the worse around June. 

According to both versions of the rule, SELL Exxon Mobil.

The moving average is good for smoothing out daily fluctuations but, I would never suggest making a decision based on the moving average alone.  In my opinion, it is completely backward looking and totally ignores the firm’s growth potential and financials.  But, then again, that’s pretty much what technical analysis is about.

I will keep track of XOM to see if the SELL recommendation proves to be correct. 

So far, not so good.  Shares of Exxon Mobil jumped 10 percent yesterday!