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What Energy Charts Are Trying to Say

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They speak volumes about the imminent direction of oil prices and the tension point we've reached.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

When getting involved in energy names, I've parked my brain outside and have been relying almost entirely on a very, very good former Minyanville professor who is now with Wunderlich Securities. This approach doesn't mean I don't look at the technicals, and below are three charts that truly speak volumes, if not about the imminent direction of oil prices, at least about the tension point we've reached.


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This first chart shows a weekly of the continuous contract oil contract (CL1) with DeMark indicators. You can see that a close above $76.05 this week will complete a Countdown 13 Sell; and you can also see that Upside Exhaustion sits at $82.31. Both these indicators urge caution.

On the other hand, traditional analysis shows a smallish reverse head-and-shoulder, a third attempt at breaking out of a pretty meaningful base, and no resistance to the mid-$120s; and the qualified break of the DeMark down-trendline projects to an eye-popping $168.68 target.

Again, we won't know if this charts resolves itself to the upside until the move is on its way, but the potential size of this move makes it well worth keeping this chart front and center.

Which brings me to the next two charts.

CWEI WEEKLY DM

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CWEI DAILY STANDARD

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Clayton Williams Energy (CWEI) is a small-cap ($483 million) independent producer of oil and gas (65%/35%), with, according to my energy guru, a compelling fundies story. I won't delve on that too much other than to say that the balance sheet is not bad for an E&P, capex is pretty much covered by operating cash flow, and any incremental production is likely to move the needle. The company is reasonably hedged for 2010 and, more importantly, it has locked in well servicing contracts (a good chunk of its operating expenses) at very attractive rates through June of 2011.

Perhaps that's why the technicals make Hoofy drool. On a DeMark weekly basis, the price failed to have much, if any, reaction to the last perfected Sell Setup and the qualified break of the TDST line (green) argues for the completion of a Countdown 13; with the current count on bar 3, it leaves plenty of upside before it completes. Note also how a qualified break of the Propulsion Up Momentum line (jagged green) projects to a Prop Up Exhaustion level of $65.74. Now look at the traditional daily chart above. Things look just as appetizing: The price is above all three upward-sloping moving averages (20,50 and 200) and just as was the case for the Oil Contract, no resistance to speak of until $52 (and you have to go back to January 2009 to see that).

I am using CWEI as a proxy for a good deal of my energy exposure.

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Position in CWEI
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