As 24/7 Trader contributor Serge Berger noted earlier today, the energy sector and Phillips 66 (PSX) in particular are some of the top stocks to watch this week for a rise. However, not all energy stocks are set to rise with the tide—so I ran my Trending123 Pattern Scan powered by Recognia to find a short-side pair to the bullish PSX play.
Buy the Ascending Continuation Triangle
Click to Enlarge As you probably know, PSX saw a near 3% rise on Friday, and intraday it is creeping up. Here’s how to play it with a technical pattern that developed over the past 28 days.
An ascending continuation triangle shows increasingly higher lows and constant highs, which tells us that buyers are more aggressive than sellers, confirmed by a breakout through a resistance level to signal a continuation of the prior uptrend. The pattern typically forms because a supply of shares is available at a certain price, represented by the upper flat line. When the supply depletes, the shares quickly break out from the top trendline and move higher.
Recommendation: Buy PSX for an intermediate-term hold (six weeks to nine months). The target range is $73.75 – $75.50 with a $61.23 stop.
Short the Diamond Top—and the Continuation Diamond
Two bearish setups have developed in Emerald Oil (EOX), a small-cap oil and natural gas exploration and production stock.
Click to Enlarge The first is a bearish continuation diamond that has developed in the stock over the past 71 days.
The price has broken downward out of a consolidation period, suggesting a continuation of the prior downtrend. This pattern began during a downtrend in February as prices created higher highs and lower lows in a broadening pattern. Then the trading range gradually narrowed after the highs peaked in mid-March and the lows started trending upward. When the price breaks downward out of the diamond’s boundary lines, it marks the resumption of the prior downtrend.
The bearish outlook was strengthened when EOX developed a diamond top just three days after the continuation diamond.
Click to Enlarge This pattern shows that the price seems to have reached a top, showing signs of reversal as it has broken downward after a period of uncertainty or consolidation. The diamond top pattern began during an uptrend as prices created higher highs and lower lows in a broadening pattern—a common trait with the continuation diamond. Another similarity between the diamond top and the continuation diamond is that the trading range gradually narrows after the highs peak and the lows start trending upward.
So for both of these patterns, you’ll know that when the price breaks below the lower boundary, it indicates the beginning of a prolonged downtrend. You can still capture profits on the downside with the following short-side trade.
Recommendation: Short EOX over the intermediate term for a $4.50 – $4.80 target with a $7.90 stop.
Want to learn how to rein in your subjective side to capture more profits? 24/7 Trader is hosting a free 30-minute webinar this Wednesday at 4:30 PM Eastern: Trade Against Your Gut: When Instinct is Your Worst Enemy.