Gran Tierra Energy's Significant Upside

Includes: EXEL, GTE
by: Michael Kudrna

Energy, specifically oil and natural gas, continues to be a favorite sector of many, including me. In looking to capitalize on that strength, I have entered a trade in Gran Tierra Energy (NYSEMKT:GTE).

A successful trade in Exelixis (NASDAQ:EXEL) has been sold down significantly as the support was showing weakness. EXEL was profitable but not nearly as profitable as anticipated. With the ASCO conference coming up in June, it should regain support soon and, if healthy, I will reload my position and revisit the upside trade.

For now, it is time to look elsewhere until that chart shows more clarity to the upside. It is important not to become emotionally attached or loyal to a stock which has zero emotional attachment or loyalty to you. When the chart starts to break down, I will get out and focus my efforts elsewhere. If I was wrong, that's fine, as I can always buy back. If I was right, I just ensured I don't take damage to my portfolio.

Back to the trade at hand. GTE is an independent energy company that engages in the exploration, development, and production of oil and gas in Colombia, Argentina, and Peru. As the end of 2009, GTE had estimated proved reserves of 22.1 million barrels of oil and 1.9 billion cubic feet of gas. The company was founded in 2005 and is headquartered in Calgary, Canada. GTE has a forward PE of less than 14, $355 million in cash and no debt according to Yahoo Finance. GTE has a projected 250% EPS growth this year; if current oil prices prove to be low, that growth percentage has solid odds of being significantly beaten.

The trade setup is showing strong intraday accumulation over the past few days, while the daily chart is trending near the bottom of a possibly newly-established trading range. If this is true, the accumulation is pointing to some sort of upside momentum about to be established, providing solid odds of at least one strong push north towards multiple resistance levels.

The concern is all the resistance levels that shouldn't be overly strong, but are enough in number to pose a challenge. The stronger the bullish volume is, the easier it will be to push past those resistance levels for even more gains.

The trade is to buy near the bottom of the trading range, with a tight stop-loss somewhere around $7.90 ... as once it hits that level, the chart starts to show too many cracks, indicating that the upside odds are not as strong. See the charts below for more analysis.

Daily Chart

Intraday Chart Showing Accumulation

Disclosure: I am long EXEL, GTE.