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Tickers in this Article: ALJ, MRO, FTO, WNR
The markets are starting to become oversold in the near term, which is tilting the odds toward long plays again. While there may be downside ahead for this correction, it is quite possible that the markets will attempt a short-term bounce soon. And while this bounce is likely to be short lived, some specific sectors could continue to move upward, independent of the general markets. One group that has been receiving a lot of interest recently and could benefit from a market bounce is the oil refiners. This group rallied very strongly earlier this year and has been trading in a tight range as it consolidates. Alon USA Energy (NYSE:ALJ), for instance, doubled from December through February, and has formed a flag formation over the past few weeks. One possible caveat though, is that volume has been extremely high throughout the consolidation. Ideally, volume will shrink as a stock consolidates, but there have also been specific global and geophysical events that have brought increased attention to this group that could explain the rise in volume. Traders should keep an eye on the flag that is forming to see which direction ALJ takes next. (For more, see Analyzing Chart Patterns: Flags And Pennants.)


Source: StockCharts.com


Frontier Oil Corporation (NYSE:FTO) is another refiner that has been consolidating a rally from earlier in the year. Much like ALJ, the consolidation is taking place on high volume, which is not typical. However, volume can be tricky to assess at times, and traders should always focus on price action first. Traders should keep an eye on the flag that is forming; FTO could make a breakout attempt on a close above $28.


Source: StockCharts.com


The volume in Western Refining (NYSE:WNR) also sticks out like a sore thumb in the chart below. However, the price action looks pretty good as WNR continues to trade in a flag pattern that began in mid February. WNR is currently testing the top of the pattern and traders should watch to see if it can close above the trendline marking the top of the pattern. More importantly, traders should watch to see if WNR can close above $18 and thus the entire pattern in the coming days. If so, it's possible that WNR could kick off a new impulse move higher.


Source: StockCharts.com


Another refiner that is consolidating after a sharp rally is Marathon Oil Corporation (NYSE:MRO). While volume has been more subdued in this name, it is still a little above average. MRO is also not trading in a classic flag like the others, but is still fairly close to recent highs. The $47.50 has been holding as support, so traders should watch this level moving forward.


Source: StockCharts.com


The Bottom Line
While it's very difficult to know how long a bounce will last in an oversold market, by sticking with stocks that have decent patterns, a trader can help mitigate the risk here. Stocks that are in bearish patterns will likely be the first to resume their trip lower after the bounce has run its course. Stocks in healthy patterns may be able to continue to trader higher, especially if the markets stabilize and trade sideways, or even move higher. The oil refiners have been consolidating some big gains from earlier this year and under the right conditions could easily move much higher.

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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