Stocks managed solid gains again on Wednesday as the much better than expected earnings from Bank of America (BAC) increased the enthusiasm for stocks. Testimony by Fed Chairman Ben Bernanke was also reassuring as he repeated that there was no firm timeline for stopping the stimulus. Yields declined further in reaction to his comments which was inline with the technical outlook.
The market internals were solidly positive with advances leading declines by a 2-1 margin. This has stalled the slight deterioration noted after Tuesday's close. Housing starts dropped 9.9% and hit the lowest level since last August. Economists were way off the mark as they were looking for some slight improvement.
One of the more interesting developments this month was the breakout in crude oil from a several-month trading range as the $100 level was overcome. Despite much lower than expected inventories in Wednesday's EIA report, crude oil was just slightly higher Wednesday but is up in early trading Thursday.
Though the weekly relative performance for the energy sector has not yet completed its bottom formation, several oil stocks are now back to support where it appears they are being accumulated. This should be a good opportunity to add some energy exposure to your portfolio as crude oil should be even higher by year end.
Chart Analysis: The daily chart of crude oil futures shows the July 3 completion of a four-month trading range, lines a and b.
- Crude testing its daily starc+ band last week so the recent sideways action was not surprising.
- The formation has an upside target and the next weekly resistance at the March 2012 high of $110.55.
- Of course in May 2011, crude oil hit a high of $114.83 based on the continuous crude oil contract.
- The daily OBV had held above support during April's sharp drop.
- The OBV confirmed the price action by moving through its corresponding resistance at line c.
- The weekly OBV (not shown) is also positive.
- There is initial support in the $104.20 area with the rising 20-day EMA now at $102.24.
Valero Energy Corp. (VLO) is a $19.1 billion independent oil and gas refiner that has been correcting since its March highs of $48.93.
- At the early July low of $33.00, it was down 32% from its high.
- The daily chart shows a potential short-term bottom formation, line e, that should be completed with a move above $36.18.
- The daily downtrend, line d, and the 38.2% Fibonacci resistance is at $39.13.
- The 50% retracement resistance is at $41.03.
- The relative performance moved above its WMA last week and looks ready to break its downtrend, line f.
- The daily OBV has pulled back to test its flattening WMA and appears to have bottomed, line g.
- Minor support is now at $34.50 with further at $33.40.
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EPL Oil & Gas Inc. (EPL) is a $1.18 billion independent oil and gas company that reports earnings on July 29.
- EPL rallied sharply from the June lows on June 21 as an HCD was triggered.
- The rally stalled at the resistance in the $31.80-$32.10 area, line a.
- There is stronger resistance in the $34.44 to $35.14 area.
- The relative performance held above the long-term support at line d, on the recent correction.
- The RS line needs to move above the resistance at line c, to confirm that it has bottomed.
- The volume was very strong on the rally from the June lows as the OBV moved above its WMA ands then broke its downtrend, line e.
- There is initial support at $28.75 with more important at $27, line b.
Phillips 66 (PSX) is a $35.94 billion oil and gas marketing and refining company, which reports earnings on July 31.
- PSX peaked at $70.52 in April and hit a low on July 3 at $54.80.
- This was a correction of 22% from the highs as the major 38.2% Fibonacci retracement support was tested (line g).
- The relative performance did confirm the April highs before dropping below its WMA.
- There is longer-term resistance for the relative performance at line h.
- The on-balance volume (OBV) shows a positive zig-zag formation but need a good volume up day to bottom out.
- The OBV has major resistance at the downtrend, line i.
- The recent bounce failed at $59.85 with further resistance at $61.74, which was the quarterly pivot.
- There is stronger resistance now in the $65 area.
What It Means: The sharply higher crude oil prices suggest an increased demand, which is consistent with the growing global demand.
The volume pattern is the strongest for EPL Oil & Gas Inc. (EPL) but a stop needs to be under Tuesday's low.
Having taken some very nice profits in Valero Energy Corp. (VLO) earlier in the year, I would look to buy near current levels, but I would wait for a deeper pullback or confirmation of a bottom in Phillips 66 (PSX).
How to Profit: For EPL Oil & Gas Inc. (EPL), go 50% long at $29.86 and 50% at $29.34, with a stop at $28.13 (risk of approx. 5%).
For Valero Energy Corp. (VLO), go 50% long at $34.90 and 50% at $34.11, with a stop at $32.84 (risk of approx. 4.7%).
For Phillips 66 (PSX), go 50% long at $56.64 and 50% at $55.44, with a stop at $54.19.
(risk of approx. 3.3%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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