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A Potentially Bullish Setup for Kerr-McGee Corp.

07/09/04 12:25:42 PM
by Kevin Hopson

Kerr-McGee's recent pullback may create a good buying opportunity, as bullish technicals and extremely pessimistic market sentiment could propel the stock longer-term.

Security:   KMG
Position:   Accumulate

Kerr-McGee Corp. (KMG) has rallied the last two months after breaking out of a falling channel formation back in May. Despite this, market sentiment towards the stock continues to be overly pessimistic; Short interest climbed from 6.74M shares in May to 9.31M shares as of June 7, an increase of 38 percent. Additionally, 70 percent (14 of 20) analysts that cover the company currently have a hold or sell rating on the stock. Given Kerr-McGee's extremely pessimistic market sentiment, there is a lot of potential buying pressure to push the stock higher.

Technically speaking, Kerr-McGee could be setting up for a reversal from its recent correction. If you look at the year-to-date chart, you will notice that Kerr-McGee is forming a falling wedge formation. This is a pattern of lower highs and lower lows that converge to form a downsloping triangle. Since wedges tend to break in the opposite direction of the slope, a falling wedge is considered bullish.

Graphic provided by:
You will also notice that the median line of the green pitchfork is coming into play around the bottom trendline of the falling wedge. As a result, this ($52.40 - $52.60) could act as a possible reversal point for the stock. Even if this price level fails to hold, there is a nice confluence of support in the $50.00 to $50.50 range. This is the site of the 1A channel line and the bottom green parallel line. Given solid short-term support at slightly lower levels, overly pessimistic market sentiment and the stock's attractive dividend yield (3.4 percent), I would look to accumulate shares of Kerr-McGee 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.

Glen Allen, VA
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