Time To Buy Spinnaker Exploration?

09/02/03 08:14:51 AM

by Kevin Hopson

Spinnaker Exploration looks to have completed the second wave of an uptrend, meaning that the stock should eventually take out June's high.

Security: SKE
Position: Accumulate

I have touched on Spinnaker Exploration (SKE) several times this year, with much of my focus being on the stock's long-term trend reversal. For example, early last spring, I said that Spinnaker appeared to be in the fifth and final wave of its long-term downtrend. Pitchfork analysis accurately predicted the major turning points in this downtrend, thus confirming the wave count.

Additionally, the stock was forming a large falling wedge and the relative strength index (RSI) and moving average convergence/divergence (MACD) were both putting in flat to higher lows despite a continuous decline in the stock price. Since wedges tend to break in the opposite direction and the bullish divergences on the chart indicated a potential bottoming pattern, all signs were pointing to a long-term trend reversal. As you can see in the chart, this definitely occurred.

Graphic provided by: Stockcharts.com.

It appears that Spinnaker has now completed the second wave (first correction) in its new uptrend. In other words, the stock looks to be in the beginning stages of its second leg up (or third wave). The reason being that Spinnaker proceeded to bounce off the black median line, a point at which prices should have reversed. As a result, the stock should eventually move above June's high and test the green median line.

In the meantime, Spinnaker should find short-term support just below the $22.00 level, site of its 200-day moving average and the bottom green parallel line. Additionally, market sentiment towards the stock continues to be negative. More specifically, half of the 14 analysts covering Spinnaker currently have a "hold" rating on the stock. Also, short interest continues to be high at 2.4M shares, which is over 5.0x the stock's normal daily volume. Given the bullish long-term outlook and the potential buying pressure from a contrarian standpoint, I would look to accumulate shares of Spinnaker on weakness.

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.