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A Gamble On Energy

05/09/07 11:22:33 AM
by Koos van der Merwe

Summer holidays are approaching, and the price of gas has started rising. Is it time to buy energy shares?

Security:   CR-T
Position:   Buy

Looking at today's energy market in search of a company in which to buy stocks, especially one that is an exploration company, could be like going to Las Vegas and playing roulette. Which company will make it? What are the prospects? All these questions come to mind when you look at the market out there, deciding where to invest. One company to consider is Crew Energy (CR) on the Toronto market.

Crew Energy is a growth-oriented junior oil and natural gas producer, with activities concentrated in central Alberta and northeast British Columbia, Canada. The company focuses on the development and expansion of its core natural gas and light oil-producing areas and the exploration of its large, undeveloped land base. Is it worth a buy? Have a look at Figure 1.

FIGURE 1: CREW ENERGY. DAILY. This stock has skyrocketed, and then dropped, showing a good deal of volatility.
Graphic provided by: AdvancedGET.
Figure 1 shows how the stock price moved from a low of $3.31 on September 26, 2003, to a high of $20.45 by December 9, 2005. From that high, the share price has fallen by 72% to a low of $8.15 by March 16, 2007. Why? What went wrong with the company's exploration projects over this period?

As technical analysts, it is not our job to look at fundamentals. We place our stop-loss orders at the calculated prices, and sell when they are hit. The saying "Never marry a stock" should always be kept in mind. The chart shows how a double top formed on December 9, 2005, and if you decided to stretch your stop-loss sell signal as the share broke below the low of $16.29, and the low reached between the two highs of the double top, you would have known to sell. The divergence sell signal given by the oscillator (5,35) would have acted as a confirmation to anyone still in doubt.

Why am I now considering the stock a buy? Figure 1 shows the price testing the upper trendline at $11.28. The oscillator has not given a buy signal; in fact, it is still very negative. One of the reasons is the RSI (14, 7,3) which has for the first time broken below the 30 line and then above it, giving a buy signal. The second reason is Figure 2.

FIGURE 2: CREW ENERGY. This chart shows a focus list with strategy testing.
Graphic provided by: Omnitrader.
Figure 2 is an OmniTrader chart that has given a buy signal based on the stochastic RSI cycle indicator (3,8) shown. Note how the indicator, a Fisher ratio of the MACD of the highs, has confirmed the buy signal. The backtest hit rate, over 250 days, gave a hit rate of 52%, an acceptable figure, but here I usually prefer a figure of 70% before I consider a buy. However, the forward test signal on 25 days not included in the backtest period gave a hit rate of 100%. This combined with an advisor rating of 79% is what captured my attention. An advisor rating is an OmniTrader formula that indicates the strength of a signal. It is based on the individual scores of the trading systems used that contributed to the vote.

The trading systems I have used are the stochastic RSI cycle, FishMACDHigh, Volatility Stoch RSI, and TC Strategy. All formulas for the strategies are available on request.

How good is the strategy? Time will tell, but a simple eyeball at the voting line on the chart shows merit.
To conclude then, based on my analysis, I would consider buying Crew Energy at the present level with a target of $12.32, the high of February 6, 2007.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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