Daimond Offshore

Pascal,

I am interested in your comments when the RT supply looks like the chart below. The background to my question is that the offshore drilling sector has gone through a significant sell off probably because of the Gulf oil spill accident. Now the US has restarted oil exploration license auctions for the Gulf and the major players are lining up to participate in a big way. So I am expecting a bottom eventually for the industry, particularly in the "picks and shovels" versus the oil explorers part of offshore drilling sector. I see nothing technically indicating the bottom is in with Diamond Offshore and this is the first time I have looked at a supply chart where the current price is over the hump on the left side and the upper boundary and neutral boundary are high up in the supply curve. The current supply chart looks quite unstable to me. How would you expect the supply chart to transition if DO actually bottoms and rallies?

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This is indeed a very interesting technical question.
Below is the supply chart for DRQ, which is also a driller.
This is a "standard" chart, where a move toward the NB would "stabilize" the supply, while a move down in price would increase the supply, because more investors will cut losses.

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You will note that the stable supply level for DRQ is at $106, which is where DRQ will have regained its 50MA, as we can see below. Also, a move in the stable supply zone will mean that the price will have broken out of its descending trend line. This is where I intend to buy, but only if EV still shows accumulation.

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DO is in the same business as DRQ, even though I do not know if either will profit from renewed investments in the Gulf. That is a separate issue. I wanted to show DRQ to be able to outline a comparison with DO. DRQ has had a pull-back below its 200MA and is in a down trend like DO is. However, DO has "broken down." DO's 50MA is well below its 200MA. This is a big difference between the two stocks: a large portion of the shareholders of DO are losing 25% or more.

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As a consequence, they are "locked-in" and will start selling in relief when the price increases. You can see that as the price increases, a "fresh" supply of stocks will be unlocked.

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This is due to the structure of the supply model: the supply model states that those who lose 25% or more do not offer their shares for sale.

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Even though LEV is positive, it will take time to "eat" through the increasing supply. There are only two ways out: time to churn the float (about 6 months) or a big news related to the stock. For example, new orders for the Gulf or Icahn buying 5% and starting to tweet his position around.