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What Will Devon Energy Do Next?

09/08/03 07:51:56 AM
by Kevin Hopson

Devon Energy looks to be forming a bullish triangle but the stock has little margin for error if higher prices are going to prevail.

Security:   DVN
Position:   Hold

Devon Energy (DVN) has recovered nicely the past few weeks after dropping roughly 18 percent from mid-June to late July. Though Devon's recent advance was halted around the $53.50 level, the stock looks to be forming a large bullish triangle. This is illustrated by the dotted gray lines in the six-month chart. Since Devon is planning to provide an operational update on Tuesday, September 9, there is a potential catalyst for higher prices in the near future.

However, it will be important to see what develops in the coming days. For example, notice how there is a significant confluence of support in the $50.50 to $51.00 range. More specifically, the black and blue median lines, the stock's 50-day moving average and July's uptrend line (bottom green parallel line) are all converging in this area. In other words, a break of key support here would all but shatter the chances of a move higher.

Graphic provided by:
Unfortunately, there is another twist to the story. Since Devon failed to test the green median line during August's run-up, a test of July's uptrend line in the near-term would indicate weakness. This behavior, also known as the "price failure" rule in pitchfork analysis, often results in a break of the bottom parallel line (uptrend line). As a result, it is important that Devon hold above the black median line and its 50-day moving average despite further support at lower levels.

If Devon is successful in doing this and can eventually overcome August's downtrend line around the $52.00 level, the stock should see a nice move to the upside. Otherwise, a break of support just below $51.00 will likely lead to a further pullback to the $49.00 level, site of the stock's 200-day moving average and the 61.8 percent retracement level from the July-August rally.

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
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