Mixed Signals for Denbury Resources

07/01/03 02:17:26 PM

by Kevin Hopson

Denbury Resources broke out of a long-term bullish triangle in May but now that the stock has proceeded higher, there are conflicting signs as to which way prices will move in the near-term.

Security: DNR
Position: Hold

Denbury Resources (DNR) is an oil and gas exploration and production company with a primary focus in the Gulf Coast region of the United States. In May, the stock broke out of a six-and-a-half-month bullish triangle formation, which is indicated by the black trendlines in the one-year chart. This move was anticipated for a couple of reasons. For example, the symmetrical triangle tends to be a continuation pattern. Since Denbury was in an uptrend prior to the formation of this triangle, it was a sign that higher prices would likely prevail.

Additionally, the stock saw a bullish divergence in the moving average convergence/divergence (MACD) indicator from mid-March to mid-April. In other words, while Denbury was putting in lower lows (as indicated by the green line in the chart), the MACD was putting in higher lows. This was a sign that the stock would likely reverse. As you can see, this occurred and Denbury eventually broke to the upside from its long-term bullish triangle formation.

Figure 1: Daily chart for DNR.

Graphic provided by: Stockcharts.com.

However, the stock is now giving mixed signals, making it difficult to predict which way Denbury will move in the near-term. For example, the triangle breakout indicated a potential price target of $13.90/share. This was calculated by taking the base of the triangle ($12.00-$9.50) and adding it to the breakout point ($11.40 + $2.50 = $13.90). As you can see, Denbury hit a new 52-week high ($13.86) on Friday, which effectively met the $13.90 price target. So where do we go from here?

Well, this is where it gets tricky. If you look at the chart, you will notice that the stock is forming an ascending triangle, a pattern of higher lows and horizontal highs. More specifically, the $13.80 level has acted as resistance several times this month, while the stock's rising 10-day moving average ($13.28) continues to act as support. Since ascending triangles tend to break to the upside, one could anticipate further price appreciation.

Unfortunately, we are now seeing a bearish divergence in the MACD. In other words, the MACD has been putting in lower highs while the stock price has continued to hit new 52-week highs. Since Denbury has reached its projected price target and there has been no follow-through in the MACD to confirm higher prices, the stock could be setting up for a reversal. As a result, it will be important to watch some key price levels to determine which way Denbury breaks in the near-term. More specifically, if Denbury can break resistance just below the $14.00 level and do so on heavy volume, the stock should see a further move up to the $15.00 level. On the other hand, if Denbury breaches its 10- and 20-day moving averages, which have acted as support since early May, the stock could be headed back to the $12.00 level, site of its 50-day moving average.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

	Glen Allen, VA
E-mail address:	hopson_1@yahoo.com

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TECHNICAL ANALYSIS

Mixed Signals for Denbury Resources

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