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Playing the weak greenback in the oil patch

The Stock: Total Energy

Recent price: $9.55

The Trend

The U.S. dollar is on a slippery slope, and investors should prepare themselves for the ramifications of a weakened greenback. At a time like this, capital flows to assets that hedge against currency risk, such as commodities. The Toronto equity market, with its strong resource position, is in a fine position to benefit. The materials sector is likely to extend its gains. Energy stocks may also benefit as the U.S. dollar slides.

The Thomson Reuters/Jeffries CRB index, representing the prices of 19 commodities, hit a 52-week high last week and has recorded six successive weeks of higher highs and higher lows amid a bullish rally. Crude oil is an important contributor to the CRB index, and its $10 (U.S.) rise in the past three weeks has helped drive the index upward.

Oil and gas stocks, although not a uniformly bullish lot, are developing more encouraging trend characteristics. The S&P/TSX energy index has rallied in recent weeks, but still sits in the middle of a long-term trading range. The lack of commitment to the sector showed in the relatively thin trading volume of the iShares S&P/TSX Energy index exchange-traded fund and similarly uninspired trading in some of the index's blue-chip component stocks last week.

Junior oil plays, however, seem to have been enjoying heightened speculative interest. The BMO Junior Oil Index ETF is up 17 per cent since the beginning of September – a much more aggressive move than the 7-per-cent gain in the broader sector index over the same period.

Oil field services stocks, in particular, develop investment lustre when the price of crude rallies. Many North American oil driller share prices are rallying, with stocks like Cathedral Energy Services and Canyon Services Group among notably strong Canadian performers. Active investors can look for building price momentum in this group.

The Trade

One candidate may be Total Energy Services, a Calgary-based energy services provider that converted back to a corporation last year after a four-year stint as an investment trust. Its stock has been categorized as Stock Trends Bullish since June, 2009, and is now presenting technical traders with a new trade entry opportunity. The share price has advanced off its intermediate-term trend line and tapped a telling resistance level last week near its 2010 high. Relatively high trading volume fuelled the move. Clearance of the $9.73 mark would spur momentum traders.

The Upside

Driller stocks respond quickly to changes in energy prices. A further move by crude oil to the $85 level will help drive Total Energy's stock toward the next objective around $11.

The Downside

As noted above, driller stocks respond quickly to changes in energy prices. If the U.S. dollar stabilized in the short term, it could send the price of crude oil back to its September level. If so, this trade carries risk. A share price drop to $8.50 would be a likely stop for uncommitted short-term investors.

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