A Look At Denbury Resources

03/17/05 08:07:12 AM

by Kevin Hopson

A recent downturn in prices could create an attractive buying opportunity for long-term investors.

Security: DNR
Position: N/A

Denbury Resources (DNR), like many other oil and gas companies, has seen its stock price appreciate significantly over the past year or so. This is best illustrated by the black pitchfork in Figure 1, which has contained prices since last August and produced a strong uptrend in the process. However, the short-term picture is a little more unclear. For example, note how prices are currently stuck in a falling channel formation, as illustrated by the blue trendlines. In addition, Denbury recently breached support along the black median line. Now that the black median line and the top of the falling channel formation (February's downtrend line) have intersected, the stock is finding resistance here. If Denbury can overcome resistance in the $34.50 to $35.00 range, the short-term downtrend will be broken and the long-term uptrend should resume.

On the other hand, if prices continue to pull back, there are three key support areas to keep your eye on. The first area of support is the $31.50-$31.70 range. This is the site of the bottom channel line, the 50-day exponential moving average (EMA) ($31.54) and the 38.2% retracement level ($31.67) from the January-February 2005 rally. The second area of support is the $30.30-$30.50 range. This is the site of the 50% retracement level ($30.34) from the January-February rally, as well as the bottom parallel line of the pitchfork. The third area of support is the $29.00-$29.30 range. This is the site of the red warning line, the 100-day EMA ($29.25), the 61.8% retracement level ($29.01) from the January-February rally and the 38.2% retracement level ($29.31) from the August 2004-February 2005 rally.

Figure 1: Denbury Resources. DNR, like many other oil and gas companies, has seen its stock price appreciate significantly over the past year or so. This is best illustrated by the black pitchfork in Figure 1.

Graphic provided by: StockCharts.com.

In the meantime, market sentiment toward the stock continues to be negative. For example, short interest as of February 8 was 1.99 million shares, which equates to a short interest ratio of roughly 4.35x. In addition, 58% of the analysts that cover Denbury currently have a hold or sell rating on the company. Because market sentiment tends to be the most bullish near tops, Denbury likely has further upside potential, as there is significant buying pressure to push prices higher. As a result, buying at one of the three support areas I mentioned could prove advantageous in the long term.

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.