Ignore Your Broker And Buy This Energy Stock
Anyone following the market via their broker’s recommendations would understandably not think very highly of energy stocks. Fortunately, we have charts to follow what the market, not the analysts, has to say. And right now, the charts of numerous oil refiners look to be on the verge of upside breakouts.
Despite a pair of major analyst downgrades this month, my favorite refiner right now is Valero Energy (NYSE: VLO).
Admittedly, it took more than a quick glance to conclude this stock was worthy of our trading capital. After all, it is still trading below its key 200-day moving average, which is a metric that many institutions and trend followers use to distinguish between bullish and bearish trends.
But that is just one indicator, and it usually lags the market. The shorter-term 50-day moving average, which lags less, has already turned higher and is closing the gap between itself and the 200-day.
Still, that is not enough to get bullish, even though bull markets do have to start from a low place. What I like even more is how volume has played out over the past eight months.
On-balance, or cumulative, volume is now at 52-week highs even though prices are right in the middle of their 52-week range. When more shares change hands on up days than on down days, we can surmise the bulls are more aggressive. This demand for shares has persisted for months despite the ups and downs in the stock
Recall that in August, when the market threw a hissy fit and plunged temporarily in a mini crash, Valero dropped from roughly $70 to $57 in just eight trading days. That was a monster breakdown, and while it took a while for prices to start recovering, on-balance volume started to move higher right away.
At the time, crude oil was falling hard and the entire energy sector was getting hit. However, a refiner such as Valero benefits from lower oil prices because oil is an input to its operations. Apparently, investors realized this, saw a bargain and started buying the stock more aggressively.
I’d like to take a moment to touch on the relationship between crude oil and gasoline prices, which is known as the crack spread. Higher gasoline prices mean refiners can sell their output at higher prices.
The U.S. Energy Information Administration (EIA) predicts the United States will consume a record amount of gasoline in 2016, surpassing the previous peak set in 2007. More demand for gasoline suggests there will be plenty of business for refiners.
This week, gasoline futures are attempting a breakout from their own consolidation pattern, and VLO appears to be following suit, making a breakout attempt from a one-month pullback. That decline ended on April 18, when trading left a bullish reversal bar right at the rising trendline from the start of the long-term bull market in early 2012.
To summarize, gasoline prices are firming and Valero is attempting a short-term breakout after testing and holding a long-term trendline. And on-balance volume tells us demand for shares is strong. Therefore, despite the fact that the stock still has a few hurdles to clear, there is enough evidence that conditions are much improved and the stock is worth owning now.
One more thing before I sign off: If history repeats itself, next week Valero is about to join a group of stocks in a short-term bull market that could see them make huge runs in a matter of days. However, most average investors won’t even be aware this bull market is happening. The window for those in the know to profit is short. If you want in, one ex-Wall Street insider shares the key.
Recommended Trade Setup:
— Buy VLO at the market price
— Set stop-loss at $59
— Set initial price target at $69 for a potential 12% gain in five weeks
This article originally appeared on Profitable Trading: Ignore Your Broker And Buy This Energy Stock