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TECHNICAL ANALYSIS


Is The Rally In Devon Energy Almost Over?

07/08/04 01:44:54 PM
by Kevin Hopson

Even though Devon has reached my ultimate upside target, current market sentiment is not indicative of a significant top.

Security:   DVN
Position:   Hold

Back in early April, I recommended accumulating shares of Devon Energy (DVN) after the stock broke out of a bullish trading range between $55.00 and $59.00. My projected price target - based on the trading range breakout - was $66.00 to $69.00. As you can see in the chart, Devon came a few cents short of reaching the upper end of this price target on July 6. Now, the bottom parallel line of the black pitchfork is coming into play around the $69.00 level and could act as resistance for the stock in the near-term. Does this mean the rally is over?

Not necessarily. Notice that Devon found support around the $59.00 level from early May to early June. This is the site of last October's uptrend line and the 1B channel line. It is also the top of March's trading range, which acted as resistance until early April. As I have mentioned before, prior resistance levels tend to act as support on pullbacks, the reason being that those traders who sold resistance are looking to get back in at the point of breakout. If Devon had breached key support at the $59.00 level, the stock would have given a sell signal. However, because this support level held and Devon has proceeded higher, the path of least resistance is up - at least until the October '03 uptrend line and the 1B channel line are breached to the downside.

Graphic provided by: Stockcharts.com.
 
Though it is possible that Devon will reverse at the $69.00 level and proceed to pull back in the near-term, current market sentiment is not indicative of a significant top. More specifically, Devon's put/call open interest ratio for the front three months (according to Schaeffer's Research) has spiked from 0.54 to 0.74 in the last two weeks. This figure is higher than 80 percent of the readings over the last year. Additionally, 43 percent of the analysts that cover Devon currently have a hold or sell rating on the stock. This number has remained constant the last few months despite the fact that the stock price has continued to climb. One would expect more analysts to enter the bullish camp given the stock's recent rise but this has failed to occur. As a result, I would continue to hold shares of Devon Energy until the technicals and market sentiment indicate otherwise.



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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