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The stock pickers market has returned in full effect for the last part of 2010 and I fully expect it will continue into 2011 for the time being. The trend is up and while we have many trying to call a top nearly every day, we must not fight the trend. Until the indices break to a lower low, we must embrace the trend and ride it while we can, but stop losses and risk management are still key. This means you do not want to be caught fully invested and holding into a correction. Make sure you have plenty of cash on the sidelines to add in case of a correction while taking profits and using stop losses to decrease risk. A correction is inevitable but the action has not tipped us off on when that day will be or how painful it will become. So for the meantime I continue to stick to the bullish sectors and ride the strong chart setups until that no longer works.

One of my largest positions happens to be in a stock we have all enjoyed playing in 2010. Kodiak Oil (NYSE:KOG) was a speculative oil play that has made us very happy in 2010 after management performed impressively with growing the business. With the energy sector showing continued strength and the chart not showing any weakness, KOG continues to be a favorable play into 2011.

KOG has appreciated in 2010 to a market cap of $1 billion and a forward PE of 17. Just last month, KOG had a share offering priced at $5.50 (consider this a support level) for just under 29 million shares of common stock. Per the press release,

Kodiak intends to use the net proceeds of the offering to repay debt outstanding under its revolving credit facility, to fund capital expenditures related to drilling, development and infrastructure, principally in the Bakken play located in North Dakota, and for general corporate purposes, including financing the potential acquisition of oil and gas properties in certain core areas, such as the Bakken play.

As anyone who follows me already knows, I am very bullish on the oil sector, among other commodities. From where I am sitting, I see the fear trade turning towards a speculation and greed trade as investors rush to add exposure to a wide range of commodities. I fully expect this trend to continue and crude oil prices of $100 a barrel to be very conservative in 2011 as the energy gurus all over are now starting to confirm after much reluctance at first. With crude oil estimates proving more and more conservative, this will mean KOG is poised to beat 2011 EPS expectations, further fueling a reason for the bulls to continue this run.

The chart is in a clear uptrend with strong accumulation. After a healthy pullback of only 38% retracement from the high on December 14th, KOG has set a new 52-week high. Following the recent move, KOG looks to be accumulating above near-term support at $6.50 for another possible breakout. As long as KOG continues to hold all support levels, we must stick with the trend and not call a top just yet.

With the energy sector continuing to be bullish, KOG seems to have room for at least one more solid run. I will look to aggressively add on a breakout over $6.95 and see how long we can ride the wave. Now that KOG has appreciated to levels that institutions can safely obtain, I expect they will continue to build their holdings up creating another catalyst for future price appreciation. This is one reason why stocks with lofty valuations can still run much higher than expected.

click to enlarge

As always, do your own homework to see if you agree. Good luck out there.

Disclosure: At the time of publication, Kudrna was Long KOG but positions may change at any time.

Source: Kodiak Oil: A Small Cap Crude Play for 2011