Frontline Marching Forward

11/05/04 08:29:50 AM

by Kevin Hopson

A couple significant patterns have marked Frontline's progress this year, and another could be in the works.

Security: FRO
Position: Hold

Frontline Ltd. (FRO) is engaged in the ownership and operation of oil tankers, which is a great place to be in today's oil market environment. If you look at the year-to-date chart, you will see that Frontline has broken out of two major patterns in the last eight months, with another pattern currently in development. For example, if you go back to mid-March, you will note that the stock formed a two-month trading range between $25.00 and $31.00. When prices broke the upper channel line in mid-May, it indicated a potential upside target of between $37.00 and $43.00.

I calculated this target by taking the number of times that prices tested the upper channel line in alternate sequence before breaking out (2), multiplying this by the width of the trading range ($31.00-$25.00=$6.00) and then adding this figure (2*$6.00=$12.00) to the bottom ($25.00+$12.00=$37.00) and top ($31.00+$12.00=$43.00) channel lines. As you can see, the stock eventually topped out around the $40.00 level, which was right in the middle of this target range. The consolidation period that followed acted as the second major pattern for the stock.

Figure 1: Frontline daily chart

Graphic provided by: StockCharts.com.

More specifically, from June to September, Frontline formed a quadruple top around the $40.00 level. This is illustrated by the flat green line. However, note how the stock put in higher lows each time it proceeded to test the $40.00 level, as illustrated by the green uptrend line. This is known as an ascending triangle formation. Ascending triangles tend to break to the upside, which came to fruition in mid-September. The price target based on this breakout was roughly $50.00. I calculated this by taking the base of the triangle (high point minus low point) and adding this figure ($40.00-$30.00=$10.00) to the breakout point ($40.00+$10.00=$50.00).

As you can see, this price target was recently met (and even surpassed). This brings us to the current pattern, which appears to be a symmetrical triangle -- in other words, the stock is putting in lower highs and higher lows. Symmetrical triangles tend to be continuation patterns so the logical break would be to the upside. If this occurs, Frontline could eventually make its way up to the $63.00 level.

Like the ascending triangle, this price target is derived by taking the base of the triangle ($55.00-$45.00=$10.00) and adding it to the point of breakout ($53.00+$10.00=$63.00). Because the stock has yet to officially break out, I am basing this price target on the assumption that Frontline will breach October's downtrend line in the near term. Whether this occurs or not, Frontline warrants watching. More specifically, a move above the $53.00 level would likely signal an upside breakout, while a move below $49.00 would indicate weakness. In the meantime, I would continue to hold.

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.