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2 High-Octane Oil Refiners
03/14/2012 10:10 am EST
With the seasonal strong period for crude oil now upon us, regard any pullbacks in these two refining stocks as a favorable buying opportunity.
As discussed in “The Four Key Seasonal Trends for 2012,” crude oil typically bottoms in February, and this year, the May crude oil contract hit a low of $96.26 on February 2 before rallying to $110.34 just over three weeks later.
The recent pullback in crude oil has merely taken prices back to the breakout level. This correction should be followed by a resumption of the weekly uptrend and a move above the February highs. A close in the May crude oil contract above last week’s high at $108.65 will indicate that the correction is over.
The technical action of the Select Sector SPDR - Energy (XLE) suggests that the popular ETF has completed its correction and new longs are now recommended. Furthermore, there are two refining stocks that look very strong technically and have appealing upside potential.
Chart Analysis: Valero Energy Corp. (VLO) is a $15.8 billion independent petroleum refining and marketing company whose stock currently yields 2.1%. VLO had a high in 2011 of $31.12.
- The weekly chart (left panel) shows that VLO closed last week above major resistance (line a) with the 127.2% Fibonacci retracement target at $30 along with the weekly Starc+ band
- In 2007, VLO had a high of $78.68. The major 38.2% Fibonacci retracement resistance is at $38.50
- The relative performance, or RS analysis, has confirmed the price action and has moved through its downtrend, line b, while rising quite sharply
- Weekly on-balance volume (OBV) also looks strong, having overcome its downtrend, line c, in January
The daily chart (right panel) of Valero Energy Corp. (VLO) more clearly shows the move through key resistance, line d, in the $26.46 area, as VLO surged last week on heavy volume.
- Daily RS line is positive and has moved well above resistance at line f. There is good support at line g
- Daily OBV surpassed its downtrend, line h, in early February and looks very strong. Volume last Wednesday was double the daily average
- VLO has initial support in the $26.60-$27.40 area with much stronger support at $24.75-$25.50
- Initial upside targets are in the $30-$31 area and then higher at $38.50
Tesoro Corp. (TSO) is a $4.1 billion refiner and marketer of petroleum products. TSO closed last week just below the major resistance, line a, in the $29.61 area. TSO made a high in 2007 at $65.98
- The flag formation, lines a and b, is likely a continuation pattern that favors an upside resolution
- Weekly Starc+ band is now at $31.98 with the major 50% Fibonacci retracement resistance at $36.20
- Upside targets from the flag formation are in the $40-$42 area
- The RS line has turned up from strong support at line c and made new highs last fall
- Weekly OBV has turned up from its weighted moving average (WMA) after breaking its downtrend, line d
- Good OBV support stands at the uptrend, line b
- TSO has first weekly support in the $26-$26.40 area
The daily chart (right panel) of Tesoro Corp. (TSO) shows Tuesday’s close just below the major resistance at line f.
- The daily RS is in a solid uptrend, line g, and shows a pattern of higher highs
- Daily OBV moved through its year-long downtrend, line h, in February
- OBV has been in a solid uptrend since late last year, line i, which is positive
- TSO has initial support on the daily chart at $28.50-$29.20 with stronger support between $27 and $27.60
What It Means: I expect the energy sector to become a leading sector in the month ahead, along with financials and technology (see “3 Sectors Leading the Charge”).
Buying these two refiners on any slight pullbacks looks to have a very favorable risk/reward even though the market is currently overextended. I also like the Select Sector SPDR - Energy (XLE) for new positions.
How to Profit: For Valero Energy Corp. (VLO), go 50% long at $27.56 and 50% long at $26.62 with a stop at $24.69 (risk of approx. 8.8%). Sell half the position at $30.88 and raise the stop to $26.56 on the remaining position.
(For further explanation of this two-stage buying process and why I advise selling half of a position, please read “Building a Strong Stock Portfolio.”)
For Tesoro Corp. (TSO), go 50% long at $28.52 and 50% long at $27.84 with a stop at $25.82 (risk of approx. 8.4%). Sell half the position at $32.16 or better and raise the stop to $27.86 on the remaining position.
For the Select Sector SPDR - Energy (XLE), go 50% long at $74.34 and 50% long at $73.62 with a stop at $69.88 (risk of approx. 5.5%).
Find all of Tom’s market comments by bookmarking his columnist page.
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