A Buying Opportunity For Marathon Oil

03/29/04 11:10:01 AM

by Kevin Hopson

Overly pessimistic market sentiment could indicate an upcoming bottom reversal for Marathon Oil.

Security: MRO
Position: Accumulate

Marathon Oil (MRO) has seen its stock price nearly double from the November '02 low but now finds itself in a steep correction. A barrage of news has attributed to the recent decline, such as potential terrorist threats against Texas refineries, broad market weakness and a 30.0M share common stock offering. However, market sentiment towards the stock has been increasingly pessimistic during the current correction, which is typical of a forthcoming bottom.

Put option open interest has been on the rise in recent days, with the May and June $30 contracts showing the most buying activity. Additionally, short interest rose from 2.89M shares on February 9, to 3.44M shares on March 8. Though this is not excessive (roughly 3.0x normal daily volume), it is an increase of roughly 19 percent. Furthermore, only four of the 20 analysts covering the company currently have a buy rating on the stock.

Graphic provided by: Stockcharts.com.

Since extreme market pessimism during a decline is often indicative of a forthcoming bottom, where should traders look to buy Marathon Oil? Well, the $29.50 to $30.00 range looks like an excellent place to start. Not only is this the site of the 38.2 percent retracement level ($29.49) from the Nov' 02 to March '04 rally, but it is also the site of the stock's 200-day moving average. Since there is significant put option open interest at the $30.00 strike price, it will be in the best interest of these put sellers to keep prices above the $30.00 level. As a result, I would look to accumulate shares of Marathon Oil on a potential pullback to the $29.50 to $30.00 range.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.