A Double Pattern Breakout For Spinnaker Exploration

12/29/04 03:27:31 PM

by Kevin Hopson

A triangle breakout and pitchfork strength both indicate a resumption of November's uptrend.

Security: SKE
Position: Buy

Spinnaker Exploration (SKE) is hovering around the middle of its 52-week trading range, but that could change soon. I say this because the stock has broken out of two bullish consolidation patterns. For example, note how prices had been contained within the top half of the black pitchfork since early December. Spinnaker's failure to test the black median line before testing the top parallel line -- also known as the "price failure" rule -- indicated strength. As a result, a break of the top parallel line was likely.

While Spinnaker was showing signs of strength from a pitchfork perspective, the stock was also developing a pattern of higher lows and lower highs (symmetrical triangle). This is illustrated by the top black parallel line of the pitchfork and the green uptrend line. Because symmetrical triangles tend to be continuation patterns and the prior move was up, a break to the upside was anticipated. As you can see, Spinnaker broke out of the triangle formation and the downtrending pitchfork configuration, thus confirming the theory for higher prices.

Figure 1: Spinnaker from a pitchfork perspective. While Spinnaker was showing signs of strength from a pitchfork perspective, the stock was also developing a pattern of higher lows and lower highs (symmetrical triangle), illustrated by the top black parallel line of the pitchfork and the green uptrend line.

Graphic provided by: StockCharts.com.

If you take the base of the triangle (high point minus low point) and add this figure ($36.47-$32.51=$3.96) to the breakout point ($34.00+$3.96=$37.96), you get a rough price target of $38.00. This means that Spinnaker has 10 percent of further upside potential. In addition, market sentiment has been growing more pessimistic toward the company. For example, short interest as of December 8 was 1.99 million shares, which is roughly 4.5x the stock's average daily volume.

Meanwhile, Spinnaker's put/call open interest ratio has gone from 0.68 to 1.18 over the past two weeks. This ratio (1.18) is higher than 92% of the readings over the last year. This means Spinnaker has a lot of potential buying pressure to push it higher. As a result, I would continue to hold shares of Spinnaker Exploration and look to buy on a pullback to the $34.00 level. This is the site of an unfilled gap, as well as the stock's short-term moving averages (10-, 20-, and 50-day).

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.