Valero Energy's Ascending Triangle Breakout

11/03/03 01:12:42 PM

by Kevin Hopson

Valero Energy (VLO) has broken to the upside from an ascending triangle formation, indicating the potential for higher prices in the near-term.

Security: VLO
Position: Hold

I have touched on Valero Energy (VLO) two times in the last month. In late September, I mentioned how the stock appeared to be putting in a significant bottom. The reasons being that the green median line was coming into play, the stock was consolidating in a falling channel formation - which usually breaks to the upside - and the moving average convergence/divergence (MACD) was showing a bullish divergence on the daily chart. As expected, the stock bottomed out around the $37.00 level. In early October, I mentioned how the stock looked to be forming a bullish pennant after this bottom reversal occurred. As anticipated, Valero broke to the upside and proceeded to test a double top around the $40.00 level.

After testing the $40.00 level for the second time in two months, Valero temporarily pulled back, finding ultimate support along the top green parallel line and its 50-day moving average ($38.82). As you can see, the stock has now broken resistance at the $40.00 level, which happens to be the top of an ascending triangle formation dating back to mid-August. An ascending triangle is a pattern of flat (or horizontal) highs and higher lows, which is usually resolved by a break to the upside. As a result, such a move could have been anticipated by traders and investors alike.

Graphic provided by: Stockcharts.com.

In any event, now that Valero has taken out significant resistance at the $40.00 level, the stock could see further price appreciation in the short-term. More specifically, if you measure the base of the triangle (from high to low), you get roughly $5.00 ($40.00 - $35.00). If you add this to the initial breakout point (roughly $40.00), you get a potential price target of $45.00 ($40.00 + $5.00). Being the case, I would continue to hold shares of Valero Energy, as there appears to be additional upside potential 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.