A Double Bottom Rally For Pioneer Natural Resources

10/11/04 03:10:58 PM

by Kevin Hopson

After putting in a double bottom last month, Pioneer Natural Resources has continued to rally. What's the outlook in the longer term?

Security: PXD
Position: Accumulate

I recently touched on the double bottom "W" pattern when I highlighted Target Corp. (TGT) last week. As luck would have it, I found another stock -- Pioneer Natural Resources (PXD) -- that has displayed the same type of pattern. If you look at the year-to-date chart for Pioneer, you will understand what I am referring to. For example, note how Pioneer sold off from the July high and eventually found support along the blue median line. This formed the left-hand side of the "W."

When Pioneer bounced off this median line (circle 1), the stock proceeded to retrace roughly 50% of the initial move down. After reversing and moving lower again, Pioneer found support along June's uptrend line (circle 2). For a double bottom to be confirmed, Pioneer had to breach the prior high, as illustrated by the dotted red line. As you can see, Pioneer broke resistance here early this month, confirming a significant bottom reversal in the process. This also formed the right-hand side of the "W."

Figure 1: Pioneer, year-to-date PXD chart

Graphic provided by: StockCharts.com.

Since then, Pioneer has proceeded to pull back sharply. However, notice how the stock is currently testing the top blue parallel line and this month's double top breakout point, both of which reside in the $34.60-$34.70 range. In addition, though not illustrated in the chart, Pioneer proceeded to close above its 10-day moving average ($36.84) and the 38.2% retracement level ($36.82) from the September-October rally on Friday. This means there is significant short-term support in the $34.60 to $34.85 range. As a result, it will be interesting to see if Pioneer can hold its ground here in the near term. See Figure 2.

Figure 2: Pioneer

Even if Pioneer proceeds to pull back, long-term investors should look to accumulate on weakness. One reason I say this is because last winter's long-term trading range breakout indicates how much higher prices could go. If you turn your attention to the long-term chart, you will note that Pioneer broke out of a 14-month trading range between $23.00 and $27.50 late last year. This trading range breakout indicates an ultimate upside target of between $41.00 and $46.00.

I calculated this price target by taking the number of times the stock tested the upper channel line in alternate sequence before breaking out (4), multiplying this by the width of the trading range ($27.50-$23.00=$4.50) and then adding this figure (4x$4.50=$18.00) to the bottom ($23.00+$18.00=$41.00) and top ($27.50+$18.00=$45.50) channel lines. In the meantime, Pioneer's short interest ratio remains high (roughly 6.0x average daily volume), meaning there is a lot of potential buying pressure to push the stock higher.

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.