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Recent Top in Denbury Resources Proved To Be Correct

11/06/03 08:13:02 AM
by Kevin Hopson

Denbury Resources recently topped out around the $14.00 level, as expected, but the near-term outlook is uncertain.

Security:   DNR
Position:   N/A

This past summer, I said that Denbury Resources (DNR) was likely to see a significant top reversal. I based this conclusion on three factors - a bullish triangle formation, my projected price target for the stock and bearish divergences on the daily chart. More specifically, Denbury had recently broken out of a bullish triangle formation, which is illustrated by the dotted black lines. By measuring the base of the triangle ($12.00 - $9.40 = $2.60) and adding it to the breakout point ($11.40), I came up with a potential price target of $14.00.

Since triangle breakouts often lead to the final thrust in a trend, in this case an uptrend, I believed the $14.00 level would be a significant top for the stock. When the relative strength index (RSI) and moving average convergence/divergence (MACD) were showing bearish divergences on the daily chart (putting in lower lows despite the stock price moving higher), I was certain that Denbury's rally would soon come to an end. As you can see, this proved to be correct.

Graphic provided by: Stockcharts.com.
 
For example, notice how Denbury met my price target almost to the exact cent. When this occurred, investors should have taken some money off the table. Now that Denbury has proceeded to pull back, the outlook is a little less certain. However, there are a couple of things to watch for to get a better gauge of the near-term price direction. For example, notice how Denbury recently bounced off November's uptrend line and the green median line. Given the confluence of support here, this was expected.

If the stock is going to move higher from these levels, Denbury must continue to hold support along November's uptrend line (~ $11.60). The stock also has to overcome broken support around the $12.00 level, the site of its 200-day moving average. Since this moving average has acted as ultimate support for the stock over the past year (up until a few days ago), it is important that Denbury move back above this level. Otherwise, the short-term picture will continue to be bearish.



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.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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