Last Friday’s stock rally spilled into the oil markets. Crude catapulted to $54, scoring a rousing breakout in the process. Capital rotated into energy stocks alongside the rally, and that has me eyeing the sector with interest. Undoubtedly, one of the best setups in the refiners’ space is Valero Energy Corporation (NYSE:VLO).
Indeed, VLO appears on the cusp of completing a high base pattern that should deliver further gains to shareholders.
Unlike the broader energy sector, which has been plumbing the depths virtually the entire year, Valero Energy has been flying high.
Record highs, in fact. With September’s surge, VLO eclipsed its prior peak set in November 2015. And now, it’s officially visiting unseen territory. That means all shareholders are sitting on profits and there isn’t any major overhead supply weighing on the stock.
Since September’s rousing ascent, VLO stock has entered base-building mode. The consolidation is allowing the stock to work through overbought conditions. The 20-day moving average has long since caught up, and the 50-day moving average is well on its way.
For further confirmation that the overstretched pressures are receding, look at the Stochastics indicator which is no longer flashing an oversold signal.
Another positive omen is the failed breakdown attempt last week after earnings. Such setups are often called bear traps as they sucker in shorts thinking the support break will see downside follow through. Friday’s rebound effectively trapped any and all shorts, adding further buying fuel for the next breakout.
The setup here is simple. Wait for a break above $78.75 and deploy bullish trades.
The VLO Breakout Trade
To capitalize on the coming jump, buy the Jan $77.50 calls for $2.90. Your risk is capped at the initial cost, and the reward is unlimited. To minimize the loss if VLO misbehaves, place a stop loss below the recent support pivot of $75.84
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
