Falling Channel For Valero Energy

09/23/03 09:32:03 AM

by Kevin Hopson

Valero Energy has been stuck in a falling channel since mid August but things are starting to look up for this refiner.

Security: VLO
Position: Accumulate

Valero Energy (VLO) recently broke below its 50- and 200-day moving averages, which is usually a bearish sign technically. However, if you take a closer look at the six-month chart, it appears that there is potential for the stock to move higher from current levels. For example, notice the falling channel formation, which is illustrated by the gray trendlines. Valero has continued to find support along the lower trendline, while meeting resistance along the upper trendline. Since you normally like to see prices move sideways or lower after a sharp run-up, which Valero did in early August, this is actually a bullish sign. In other words, falling channels tend to break to the upside.

However, most traders know better than to base their buy or sell decisions on a sole indicator or pattern. As a result, it is important to find other factors at work. In this case, there are several other indicators that help support this theory. For one, May's former downtrend line (black line) - which acted as prior resistance - should now act as support around the $37.20 level. Also converging around this price level is the bottom green parallel line, as well as the 61.8 percent retracement level ($37.07) from the August rally.

Graphic provided by: Stockcharts.com.

Furthermore, you will notice that the moving average convergence/divergence (MACD) has yet to put in a new low this month despite the fact that the stock price has. This is a developing bullish divergence on the chart and could indicate a potential bottoming pattern. Even if the MACD continues to pull back, you will notice that this indicator has bottomed out around -.50 several times since May. In other words, all signs are pointing to a potential bounce in the near-term.

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.