Cobalt International Energy (CIE) is a $4 billion oil drilling and exploration company that hit a low of $6.30 on Oct.4. CIE traded as high as $17.22 in April.

• The daily chart shows the formation of a reverse head-and-shoulders bottom formation with the left shoulder (LS) having formed in August and the head in October
• The sharp drop on Nov. 1 and the low of $8.80 is tentatively labeled as the right shoulder (RS)
• Though there was a volume spike at the right shoulder, the overall volume was highest going into the left shoulder and was lower at the head and RS
• This is the volume pattern that one would expect to see in a reverse H&S bottom
• The daily OBV has corresponding key resistance at line a. The weekly OBV (not shown) is positive
• A close above the neckline at $11.65 would complete the formation and give upside targets at $16.65
• Minor support now stands at $10 with stronger support at $9.40-$9.60

EXCO Resources (XCO) is a $2.7 billion independent oil and natural gas company that spiked to a low price of $9.33. It traded at over $21 earlier in the year. The daily chart of XCO looks quite similar to that of CIE.

• The neckline of the reverse H&S bottom formation is at $13.55
• The right shoulder low at $11.07 is quite a bit lower than the left shoulder at $11.81, but that often happens
• A close above this level (preferably on strong volume) will give upside targets in the $17.80 area
• The daily OBV is still in its downtrend, line b, while the weekly OBV (not shown) did form a positive divergence at the October lows
• There is initial support at $12-$12.40

What It Means: Crude oil’s action and the fact that the Advance/Decline (A/D) lines have turned up nicely suggests that Wednesday’s drop was just to shake out some weak longs. On Wednesday, I allowed for a deeper correction if the Spyder Trust (SPY) violated the support at $122.78, but the low was $122.86.

A higher close for the week should set the stage for a push to the upside in the next week, and these two energy stocks are expected to participate. Though I generally do not advocate anticipating the completion of chart formations, for these two stocks, the risk/reward seems favorable.

How to Profit:

For Cobalt International Energy (CIE), buy at $10.18 with a stop at $9.29 (risk of approx. 8.7%). On a move above $12, raise the stop to $9.90.

For EXCO Resources (XCO), buy at $12.31 with a stop at $11.36 (risk of approx. 7.7%). On a move above $14, raise the stop to $11.86.

For the Select Sector SPDR - Energy (XLE), buy at $69.24 with a stop at $65.56 (risk of approx. 5.3%).

Our earlier recommendations to buy the United States Oil Fund (USO) and Sunoco (SUN) were not filled and those orders should be cancelled at this time.

Previous buyers of Noble Corp (NE) should be long at $29.56. Raise the stop from $27.08 to $32.90.