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CYCLES


Devon Energy Closing In On A Major Low?

11/16/12 11:47:26 AM
by Donald W. Pendergast, Jr.

Shares of Devon Energy appear to be getting close to an important price reversal area, and with numerous technical dynamics aligning in bullish fashion, the anticipated rally in this large-cap energy player's stock could provide plenty of opportunity for skilled swing traders. Here's a closer look now.

Security:   DVN
Position:   N/A

Although Devon Energy (DVN) isn't as volatile as some other large-cap energy sector stocks are (like Baker Hughes [BHI] or Apache [APA], for example), it still is capable of numerous, tradable swing moves during any given year and can also move in sustained trends that can sometimes last for several months at a time.

DVN has been in a long-term downtrend for some time now. After peaking at 76.34 on March 19, 2012, the stock has fallen by more than 30% and may now be attracting the interest of value players in the market -- as are many other beaten-down energy names. DVN's long-term money flow, although slightly negative (below its zero line) is now manifesting a bullish divergence with price, and that's a key clue that the stock is beginning to set up for a potential reversal, especially since DVN's 20-, 40- and 80-day price cycles are all in strong agreement that the stock should bottom by no later than November 15, 2012. See Figure 1.

The green vertical boxes depict this important, statistically derived time/price projection zone, and those who are interested in building a new long position in the stock are sure to find this to be of great interest.

FIGURE 1: DVN, DAILY. Now that DVN's 40-day cycle low is late in bottoming, aggressive traders may want to start positioning themselves for the anticipated bullish reversal in this large-cap energy player's stock.
Graphic provided by: Sentient Trader.
 
Once DVN does finally bottom, no one knows if it will make a sharp "V" reversal or a slower "W" or double-bottom pattern before rallying. For this reason, it's best to rely on your favorite mechanical swing trading system to generate your long entry signal.

This system could be based on a volatility breakout, a daily close above the three-day simple moving average of the daily highs or even a channel breakout. For those without access to a mechanical system, you could also time a long entry using a good till canceled buy-stop order at 54.00 (November 14, 2012, Wednesday's high). If DVN does reverse soon, blasting above that price, consider selling December '12 DVN $50.00 put options (Figure 2). The bid-ask spread is reasonably close, the daily time decay (theta) is $2.26 per day/per contract, and the delta is only (0.2524). Set up your trading platform to sell the put once DVN breaks above 54.00 and then hold the trade until:

1. DVN makes a daily close below 52.00 or
2. The put doubles in price, whichever occurs first

If DVN follows through, quickly rising after you're filled on the option trade, buy the put or puts back if they increase in value by 50% -- exiting the entire position, since it's always possible that the bullish reversal may stall, making a double bottom before going on up into either of the red time/price projection zones on the chart. By the way, the 40-day cycle in DVN should peak between November 29 and December 12, 2012, somewhere in the price range of 55.31 to 66.65.


FIGURE 2: PUTS. The December '12 DVN 50.00 puts feature a modest delta, high time decay and a reasonable bid-ask spread.
Graphic provided by: TradeStation.
Graphic provided by: OptionStation Pro.
 
If DVN follows through, quickly rising after you're filled on the option trade, buy the put or puts back if they increase in value by 50%, exiting the entire position, since it's always possible that the bullish reversal may stall, making a double bottom before going on up into either of the red time/price projection zones on the chart. By the way, the 40-day cycle in DVN should peak between November 29 and December 12, 2012, somewhere in the price range of 55.31 to 66.65.

However you choose to play this anticipated reversal in Devon Energy, be sure to keep your per-trade risk small in relation to the amount of equity in your margin account (remember, you need to have a margin account to sell put and call options), preferably in the 1% to 2% area. Trade well until we meet here again.




Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

Title: Market consultant and writer
Company: Trendzetterz
Address: 81 Hickory Hollow Drive
Crossville, TN 38555
Phone # for sales: 904-303-4814
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