Talisman Energy Approaching Some Key Support Levels

11/01/04 04:48:52 PM

by Kevin Hopson

Despite meeting its minimum upside target, Talisman Energy may have further to go.

Security: TLM
Position: Accumulate

Talisman Energy (TLM) broke out of a bullish trading range in mid-September, indicating a potential upside target of between $29.00 and $31.40. I calculated this price target by taking the number of times that prices tested the upper channel line before breaking out, multiplying this figure (3) by the width of the trading range ($24.20-$21.80=$2.40) and then adding this number (3*$2.40=$7.20) to the bottom ($21.80+$7.20=$29.00) and top ($24.20+$7.20=$31.40) channel lines.

As you can see in both Figures 1 and 2, Talisman recently topped out around the $29.00 level ($28.62 to be exact), effectively meeting the minimum upside target based on the trading range breakout. However, just because the first price target was met and the stock reversed does not mean Talisman cannot move higher. When trading range breakouts occur, prices tend to test the first upside target and pull back, only to move higher again. Based on my experience with trading range breakouts, the second price target is often met during the ensuing rally. Though Talisman has yet to reverse its correction and confirm the beginning stages of another rally, the stock may be close to doing this.

Figure 1: Trading range chart for Talisman Energy

Graphic provided by: StockCharts.com.

For example, if you look at the pitchfork chart (Figure 2), note that the bottom black parallel line and the blue median line have both intersected (or converged) around the $26.20 level. Just below this level (per the trading range chart) is the 38.2% retracement ($26.02) from the August to October rally. As a result, I would look for key short-term support in the $26.00 to $26.20 range.

Figure 2: Talisman pitchfork.

Even if this support zone fails to hold, there is a significant confluence of support in the $25.20 to $25.40 range. This is the site of the green median line, the sliding red parallel (or warning) line, the stock's 50-day moving average ($25.36) and the 50% retracement level ($25.20) from the August to October rally. Ultimate support appears to be in the $24.20 to $24.40 range, which is the site of September's quadruple top breakout and the 61.8% retracement ($24.38) from the August to October rally. Given the stock's upside potential and key support at slightly lower levels, I would look to accumulate shares of Talisman Energy in the $25.20 to $26.20 range and buy outright if support in the $24.20 to $24.40 range is eventually tested.

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.