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Eliminate as many negatives as possible

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Often times it may be difficult for a trader or investor to invest with an unbiased view. That's a problem I used to have until I learned something about supply/demand analysis. Recently PremierMarkets.com profiled shares of Halliburton (NYSE:HAL) as bullish should the stock trade $44 as it would give a double-top buy signal outside of longer-term downward trend (bearish resistance). We selected HAL over Schlumberger (NYSE:SLB) only based on supply/demand characteristics and chart pattern. Both are giants in the oil and energy services industry, but for some reason, the supply/demand characteristics looked more bullish for HAL. Both stocks had very bullish vertical counts indicating that their stocks could see higher prices, but what supply/demand was "telling us" was that HAL might have less supply nearby and might move higher a little faster. For an options trader who's biggest enemy is time premium, supply/demand analysis can make a difference to the bottom line of an account.

Halliburton Chart - $1 box.

Supply/demand charts don't concern themselves with time as it relates to building its chart. However, time is recorded on the chart with numbers 1-9 (January-September) and letters A-C (October-December). One thing I like to do is try and figure out where overhead stock is at and how long ago that overhead stock may have been purchase. My thinking has always been that shorter term traders in HAL at levels above $45 are long gone from levels above $44 and only short-term bulls and longer-term bulls remained when downward trend was broken to the upside at $42. If you look to the left of current trading in HAL, you'll see the red letter "A" on the chart. That signifies trading that took place back in October of 2000 and perhaps represents overhead supply that may still be holding the stock, but has a longer-term view for their investment.

Schlumberger Chart - $1 box

Shares of SLB are also looking bullish, but notice the difference in this chart. The first would be that this stock has yet to trade above bearish resistance so downward trend remains negative. Also note the red "2" at $75. Compared to HAL overhead supply, this represents a closer time period of overhead supply. If we look at a bar chart, one would see how many investors may have gotten trapped in the stock on February 12th of this year that could have bought just before the decline. While we never know for sure who intends to do what with stock previously bought short-term (hold it or sell it) a trader should try and eliminate as many potential negative in a trade as possible. The two big differences we observed between HAL and SLB on their charts was not in the bullish price objectives, but the current trends as signified by the bearish resistance and where overhead supply was as it related to time. On May 14th, shares of HAL closed at $43.95 and currently trade $46.64 (up 6.12%). On May 14th, shares of SLB closed at $63.75 and currently trade $67.02 (up 5.13). While the percentage difference doesn't seem like much, just remember that we're just three trading sessions into things right now. If you're an options trader you know how a 1% price movement in a stock can also affect the value of your options. Sometimes it's the little things that make a big difference.

Questions to ask yourself in a bullish trade

1. What's the trend of this stock?
2) Where's supply?
3) Where's demand?
4) How old is overhead supply and what might they be doing?
5) Is there another stock in the same group that looks better?

Jeff Bailey
Senior Market Technician

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