Cimarex Energy's Cup And Handle Breakout

09/22/04 03:47:26 PM

by Kevin Hopson

The recent consolidation pattern confirms the long-term uptrend for Cimarex Energy and the likelihood for higher prices.

Security: XEC
Position: Hold

I last touched on Cimarex Energy (XEC) in late August 2004. At that time, the stock was testing the upper channel line of a prior trading range between $26.50 and $29.50. Since prior resistance levels tend to act as support and the trading range breakout in late June signaled higher prices, I recommended holding shares of Cimarex Energy in anticipation of another rally.

More specifically, the trading range breakout indicated an upside target of $35.50 to $38.50. I calculated this price target by taking the number of times that the stock tested the upper channel line in alternate sequence before breaking out (3), multiplying this number by the width of the trading range ($29.50-$26.50=$3.00) and adding this (3*$3.00=$9.00) to the bottom ($26.50+$9.00=$35.50) and top ($29.50+$9.00=$38.50) channel lines.

Graphic provided by: Stockcharts.com.

As you can see, Cimarex found support around the $29.50 level and proceeded to move higher. In doing so, the stock formed a nice U-shape (or cup pattern), as illustrated by the pink circle. Just last week, Cimarex formed a small trading range -- or handle -- to complete the cup pattern. When you put these two patterns together, you get a cup and handle formation. Cup and handle formations tend to be a continuation pattern, so the recent breakout confirms the long-term uptrend.

If you take the distance from the left side of the cup to the bottom of the cup ($33.00-$29.50=$3.50) and add this number to the breakout point ($33.50+$3.50), you come up with a potential price target of $37.00. Since this price level is in the middle of my initial target range ($35.50-$38.50), I believe Cimarex has additional upside potential in the near term. As a result, I would continue to hold shares of Cimarex until the chart says 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.