Last week, I brought you a few solar plays that I believe have the potential to trend higher for quite some time (see Five Solar Stocks Turning Up the Heat
). This week I'll focus on oil and gas (O&G) stocks that I've found making long and profound bases. The goal of these 2 articles is to help you form a watch list of companies in industries that are ripe for technical breakouts. Should the global economy truly be turning around, it should be accompanied by an uptick in demand for energy, thus driving the earnings of the underlying companies.
Regardless of how long this takes, if traders believe it to be coming, they’ll pounce on the stocks long before the fundamentals are reflected in the income statements. In preparation for the possibilities, it’s very important to have our list in place. When the technicals are confirmed, we'll pounce.
While the list of individual names is vast, one of the most simplistic ways an investor can gain exposure is through an exchange-traded fund (
ETF).Proshares Oil and Gas
The chart above defines what I'm looking for in technical setup.
DIG was a newly minted ETF in early 2007, and has enjoyed the euphoria and the dismay of volatility in oil and gas prices. For all of 2009, DIG has oscillated between $20 and $30, forming what looks to be a decent channel over several months. The multi-month base has hardened up, giving us great parameters from which to determine risk/reward while the downside risk may have been minimized with the capitulation in March. A trend line drawn from the March lows through the July lows gives us our support, that which I wouldn't want to see taken out while the lateral trend line in the $30.00 level is providing overhead resistance.
From the lateral trend around $30, DIG has started consolidating of late, edging its way back towards the 50- and 200-day moving averages. The May 15 low of $25.96 looks like a logical point of support in the short term and I'm looking to establish a position on weakness with a stop below $25.90. I'd wait patiently for the $30.00 level to be recaptured at which point I'd look to increase my position into a breakout of $30.60. Devon Energy
has a technical setup that ebbs and flows, thus making our breakout areas easier to define. Traders will note the higher low formed off of the March lows and one can draw a trend line between these 2 lows giving us a clear support level and logical sop level. Going back to October, the $60 area has provided a line of demarcation for DVN. Dropping below this line would be the first warning sign, and taking out the lower supporting trend line would be our call to abandon the position.
There are 3 areas of potential congestion for DVN, and once these are taken out, I suspect it would catch momentum quickly. First, the 50 MA on the weekly might cause DVN a few headaches as it bumps it from underneath. We're in the eleventh month of DVN settling underneath this important line, so taking it out will be one less barrier. The second resistance point for DVN comes from the upper trend line I've drawn above. Connecting the December 2008 and June 2009 highs, this area will have a similar effect as the 50 MA. Lastly, while the broad markets have surpassed their June highs with the recent run, DVN is playing catch-up. June’s highs of $67.40 may present an area for pause.
Similar to DIG, I'm looking to establish a position in DVN in anticipation of a break. My stop level will be the 50-day moving average, giving it quite the leash and ample time to play out.BJ Services
BJS also has many technical features that I find attractive. Notice the double bottom off the lows with the March low being a tad higher than that in December, a bullish sign. Next, notice the respect BJS gives its 50 MA on the weekly. When it came flying into it from underneath, BJS paused and corrected in near-perfect fashion. Bump your head, back off. Bump your head again, rub your second bruise. Four weeks ago, BJS closed above this psychological barrier for the first time in a year. Now the 50 MA is providing support as BJS kisses it from above with near-picture-perfect beauty.
On the daily (not shown), BJS is coiling right on top of the 50 MA in a healthy manner, sparking me to start a position on Monday with a stop below $13.50. Should the most recent digestion hold, I suspect this name will attack the upper trend line starting from the May high in the $15 area.Apache Corporation
The $89-90 mark will be huge for APA as it's been an area of overhead supply on numerous occasions, going back to late 2008. Will this break attempt fail like the others, or are we about to see APA say goodbye to this multi-month base and head towards par? I want to see APA clear these recent highs saying goodbye to the most recent digestion area over the last several days.
The stock has had a stellar run off the July lows, but unlike other sectors, hasn't taken out the channel and continues to languish at lows. Rather than over-anticipate this break, I'm waiting for the stock to clear $88.50 on volume, which will be my signal to step in. I'll then use the $86.00 level as my stop.
There's no question the technical setups are developing within the Oil and Gas world, however the recent uptick in the dollar (thus sparking oil weakness) has capped these charts and, at least for now, halted their upside momentum. Whether or not they're back in play is irrelevant, however we should remain prepared in the event the trade comes our way in the near future.Get email alerts containing every trade Quint makes and access to his portfolio - 14 day FREE trial to FlexFolio