Forest Oil Bounces Off Key Support

11/11/04 04:18:22 PM

by Kevin Hopson

Could the recent bounce lead to a resumption of the longer-term uptrend?

Security: FST
Position: Hold

Forest Oil (FST) had been trading within the green pitchfork for nearly seven months when prices broke to the upside in mid-September. As you can see in the year-to-date chart, Forest has tested the top green parallel line (prior resistance) twice since the initial breakout. However, the recent test was more successful, as a significant confluence of support came into play here. More specifically, the top parallel line of the purple pitchfork, the stock's 50-day moving average and the 38.2% retracement level from the August to October rally all converged in the $29.20 to $29.60 range, along with the top green parallel line.

In the meantime, the stock looks to be forming a falling wedge, as illustrated by the black trendlines. Because falling wedges tend to act as continuation patterns, this formation usually leads to higher prices. As of right now, a break of October's downtrend line ($30.40) would likely confirm an upside breakout. In addition, during the formation of this falling wedge, Forest has been seeing some positive divergences on the daily chart. For example, note how the relative strength index (RSI) and moving average convergence/divergence (MACD) have been flattening out despite the fact that the stock price recently put in a lower low. This may be nothing but it is something to watch, as a bottoming pattern could be developing.

Figure 1: Forest Oil Corp.

Graphic provided by: StockCharts.com.

Market sentiment also supports the likelihood of higher prices. For example, more than half of the analysts that cover the company (10 out of 18) currently have a hold or sell rating on the stock. In addition, short interest (as of October 8) was 2.68 million shares, which equates to a short interest ratio of nearly 4.5x. As a result, there is a lot of potential buying pressure to push prices higher. Even if Forest breaks down from current levels, the stock should find solid support around the $28.40 level. This is the site of the bottom blue parallel line, October's low and the 50% retracement level from the August to October rally. As a result, I would continue to hold shares of Forest Oil.

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.