Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.
What are we looking at?
Energy stocks with long-term upside potential.
The screen
We limited our pool to the energy stocks in the S&P/TSX 60 Index.
To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investor's behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock? We selected only those stocks that are trading above their rising 40wMA.
Stocks tend to stay relatively close to their 40wMA. When stocks rise far above this average, investors often use this as an opportunity for profit taking, which then leads to a price correction toward the 40wMA. Sometimes, however, the demand for a stock could be so extensive that the price does not pull back to the average, but rather stays within a horizontal price range and, over time, the average catches up to the price.
What did we find?
We found 11 stocks that are in a long-term up-trend and trading above their rising 40wMA. The results suggest that these energy stocks are extended and could either pull back or trade in a horizontal range for a period of time until their respective 40-week moving averages get closer to the price.
The smaller the gap, in terms of percentage, between the current trading price and the stock's average, the better the entry level for investors. Therefore, at 4 per cent, TransCanada has the least downside risk, while Canadian Natural Resources, Encana and Enerplus have the greatest downside risk in the short-term, as these are currently the most overbought stocks.
Only a sustained decline below their respective 40-week moving averages would alter the long-term outlook of these stocks.
Please note that overbought conditions can persist for extended periods of time, especially in a bull market. The longer an overbought condition exists the deeper the correction will likely be thereafter.
In the table below, we summarize our findings. For a more detailed list covering all the energy stocks listed on the S&P/TSX composite please go to www.phases-cycles.com and select "trial subscription."