With crude oil plummeting $7 since June and trading under $100 a barrel this week, it seems to be a bad time to look at energy stocks. However, when everyone was running away, the sector lost only 3%, and various indices landed on respective rising trendlines.

In other words, energy stocks were relatively resilient, and that is a bullish sign.

It now appears that United States Oil (NYSE:USO) is in the midst of a powerful upside reversal pattern called an island reversal. USO gapped down Tuesday, but closed near its highs for the day. On Wednesday, it gapped back up, leaving Tuesday's trading isolated from the rest of the pattern, similar to an island surrounded by water.

Of the stocks in this sector, I like the bullish prospects of integrated oil and gas company Chevron (NYSE:CVX). Not only does it offer a technical reversal of its own, but it also has a cushion of safety provided by a 3.3% dividend yield.

The stock peaked in mid-June at $133.57, and in the next few weeks, eased lower to $128.03. Considering its price level, that decline was rather modest, and CVX respected support going back to the middle of last year.

Volume during the decline contracted as it is "supposed" to do during a correction. We can surmise that the bulls simply took their foot off the gas and bears did not step up their activities. Prices fell under their own weight -- the media calls that "profit-taking."

The price slide was also very orderly and left a flag pattern, so named for its appearance of a flag flying on a flagpole. Typically, the pattern resolves in the direction of the trend that preceded it, and with Wednesday's rally, that does seem to be the case.

The analysis is really that simple. A stock traded in a range for months, broke out to the upside and then eased back to test the breakout. While there are no guarantees, the odds favor higher prices ahead.

How high? To forecast a target, I used the pattern from which it emerged as a guide, measuring the height of the pattern and projecting that up from the breakout. I used the lower horizontal line on the chart to be conservative, which gives us an objective in the mid-$140s.

Action to Take -->
-- Buy CVX at market price
-- Set stop-loss at $126
-- Set initial price target at $144 for a potential 10% gain in eight weeks

This article was originally published at ProfitableTrading.com:
Upside Reversal Predicts Double-Digit Gains in This Oil Stock


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