Shares of oil refiner Valero Energy Corporation (NYSE:VLO) thanks to its recent multiweek rally is now higher by more than 13% for the year. Aside from the “chart breakout,” what makes the recent rally in VLO stock even more believable in the medium term is an increasingly bullish posture in energy stocks as a sector. Barring a big bearish reversal in this sector, it does look to have plenty of tailwinds into year-end.
So you know, Valero Energy is scheduled to report its next batch of earnings on Oct. 26, which is to say that from a “trading” perspective, in my eye, it is better not to be exposed to the stock through the earnings report.
This could be very different, however, from longer-term believers in Valero, who should not be too frazzled any possible volatility in either direction following the earnings report.
To get some perspective of the recent strength in energy stocks, I plotted a so-called “ratio chart” of the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) versus the S&P 500. Note that the recent strength has broken the persistent down-trend. According to my proprietary trend-measuring scanner algorithm, energy stocks could soon flip to medium-term bullish — so far this segment is only near-term bullish.
When I last mused about Valero in this column on Sept. 13, I offered a bullish view and called the stock a “breakout beauty” with a next potential upside target in the high $70s.
Since then, the stock has rallied about 10% and reached my near to possibly intermediate term upside target. From where I sit however and through a multimonth lens more upside looks likely.
To be clear, this is not a victory lap on my part but rather a testimony to how a holistic and repeatable process to trading and investing is a much more pragmatic and ultimately more profitable approach than randomly picking stocks because of a good chart or someone’s stock tip.
VLO Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that prior to the recent breakout, VLO stock had been coiling below the blue horizontal line (around the $72-$73 area for many months.
From a momentum perspective, although the recent breakout was vicious, on this weekly chart the MACD momentum oscillator at the bottom does look to offer plenty further upside — possibly into year-end for now.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Breakouts such as we are seeing in VLO stock can be taken advantage of with a high-probability income-generating strategy using options.
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On the daily chart, we see that in the near-term, VLO stock increasingly looks to be overbought from a momentum perspective, and in my eye it now needs a rest. Considering a potential broader stock market seasonal volatility spike at some point in October and possibly into November still stands a good chance I at the very least do not want to chase the stock higher at these levels.
A pullback into the mid-to-possibly-low $70s followed by a strong bullish reversal could set up better reward to risk trades on the long side again for this stock.
While more patient investors could still look to buy VLO stock at these levels for a possible rally toward the mid $80s into year-end, the more active crowd could look to wait for a possible pullback and consolidation period before legging into new long positions.
Check out Anthony Mirhaydari’s Daily Market Outlook for Oct. 11.
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