Frontier Oil - A Classic Example of Broken Support Turned Resistance

11/05/02 01:21:41 PM

by Kevin Hopson

Frontier Oil broke a spread quintuple bottom in the $14.50 to $15.00 range back in July. Since then, this area of broken support has acted as stiff resistance for the stock.

Security: FTO
Position: Accumulate

Frontier Oil (FTO), a small oil refiner with operations in Wyoming and Kansas, tested a key support level back in July. More specifically, Frontier formed a spread quintuple bottom in the $14.50 to $15.00 range, which dated back to the stock's September 2001 low. Since there was long-term support at these levels, many investors considered the July pullback to be an excellent buying opportunity. Additionally, a significant amount of at-the-money call options ($15.00 strike price) were bought on speculation that the stock would rebound here.

Unfortunately, investors went to the well too often and the stock eventually broke support in the $14.50 to $15.00 range. As you can see in the chart, this area of broken support acted as resistance as the stock attempted to move higher, the reason being that many investors bought around the $15.00 level over the past year, as the stock had found continued support here. Once this area of support was breached, it was only normal for investors to want to get out (break even) as prices made their way back towards this level.

Graphic provided by: StockCharts.com.

This is why significant support levels tend to act as resistance once they are broken, and vice-versa. Obviously, the more substantial the support is at a particular level, the harder it will be to move back above that price after breaking it. This was definitely the case with Frontier Oil, as the stock topped out around the $15.00 level a number of times before recently breaking through. A significant amount of call open interest at the $15.00 strike price also added resistance here, as sellers of these contracts have been putting downside pressure on the stock to try and keep prices out-of-the-money.

As you will notice, Frontier Oil successfully broke a triple top in the $15.00 to $15.50 range on Monday, giving a short-term buy signal in the process. As a result, the next upside target appears to be the $16.50 level, site of the 50 percent retracement from the stock's all-time high (April 2002) to October's low. If Frontier can eventually overcome this level, the ultimate upside target would be the $17.50 to $18.00 range, site of the stock's long-term downtrend line and the 61.8 percent retracement level from April's high to October's low.

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.