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3 U.S. Refinery Stocks Poised to Break Out - 44430 views
WINDERMERE, Fla. (Stockpickr) -- U.S. stocks remain under volatility pressure Friday as traders brace for the economic fallout caused by an 8.9 magnitude earthquake that rocked Japan and triggered a huge tsunami with 12-foot waves that crashed onto the shores of the northern coastal region. The earthquake has already caused ripples throughout the currency markets, with the yen gaining sharply vs. the dollar and euro, as nervous Japanese traders took risk off the table.
As of midday, parts of the U.S., including the Pacific Northwest and Hawaii, are under a tsunami alert. Investors are clearly on edge over the potential fallout on the West Coast if a major tsunami does indeed come ashore.
At the same time, traders are also monitoring Saudi Arabia very closely. Rumors have been swirling for weeks that a “Day of Rage” could bring social unrest to the Oil Kingdom today.
The flight to safety has brought traders into U.S. stocks as of midday, with the Dow Jones Industrial Average higher by around 60 points and the S&P 500 up by around 8 points. The tech-heavy Nasdaq has advanced by around 15 points. This action is quite the contrast to how stocks reacted in European and Asia, with both regions being hit with notable selling.
Considering all of these events, one sector looks poised to benefit big off of the Japanese earthquake: U.S. oil refinery stocks. CNBC reported that 18% of Japan’s oil refining capacity was knocked offline by the earthquake. This loss of refining infrastructure means that Japan is going to have to turn towards outside energy firms to meet their domestic demand. Keep in mind that Japan is the world’s third largest oil consuming nation, so this is not a country that can be offline for long and maintain its economy.
This news has set up a number of U.S. refinery stocks that look poised to break out. A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.
Here‘s a look at a number stocks, including some U.S. refinery stocks, that look poised to breakout and could have some big upside potential from current levels.
One U.S. refinery stock that looks poised to break out is Tesoro (TSO), which engages in refining and marketing petroleum products. This stock was already in a bullish uptrend on the year with shares up an impressive 29%. After the earthquake in Japan, this stock looks ready to potentially trade even higher.
One of the great things at Tesoro is that it has refinery operations in Hawaii and California, which are geographically well-positioned to serve Japan. Of course, that would change if a tsunami hit those regions and knocked their production offline, but so far that doesn’t look likely to happen.
If you take a look at the chart for Tesoro, you’ll see that the stock is quickly approaching a major breakout if it can manage to trade above some past overhead resistance at around $26 a share. Considering the stocks action today, this breakout is only a few points away with the stock currently changing hands at around $24 a share. Traders are going to want to watch this stock closely now to see if the breakout can hit since it could set the stock up for much higher prices.
If Tesoro breaks out, the next areas of significant resistance won’t come into play until around $31.25 and at $40 a share. This leaves plenty of room for upside appreciation if the stock does indeed continue to trend higher and eventually breakout. The odds of a successful breakout will increase dramatically if volume picks up in the next couple of trading sessions as the stock approaches $26 a share. Traders should watch for volume on any breakout that is well above the three-month daily average of 6.1 million shares.
Recently, volume is well below that amount at only around 4.5 million shares, so continue to monitor the volume for a confirmation that large institutional traders are moving into this stock. I would really like to see volume of 7.5 million to 8 million on any breakout to get me excited about the potential for a run at $31 to $40 a share for Tesoro.
Keep in mind that this stock is also heavily shorted with around 13.4% of the tradable float sold short by the bears. Short sellers could get really caught off guard here when you consider that they’ve increased their bets during the most recent reporting period by 7.2% or around 1.2 million shares.
Major holders of Tesoro include David Dreman at Dreman Value Management, with a 2.4 million-share position in the stock as of the most-recent period. Tesoro recently showed up on a list of 10 top-performing stocks of the year.
Alon USA Energy
Another U.S. refinery stock that is setting up nicely for higher prices and a potential major breakout is Alon USA Energy (ALJ), an independent refiner and marketer of petroleum products operating primarily in the South Central, Southwestern and Western regions of the U.S. This is another refinery stock that’s been in a monster uptrend in 2011 with shares already up over 76%.
Just like Tesoro, Alon USA Energy is well-positioned geographically to serve Japan and help them meet their oil refining needs. The company has major refining operations on the West Coast in places such as Oregon and California.
If you take a look at the chart for Alon USA Energy, you’ll see that this stock is extremely close to a major breakout if it can manage to trade above some past overhead resistance at around $11.73 a share. With the stock currently trading around $10.50 a share, we’re only one point away from testing that significant price level. It’s also worth noting that the stock has already touched $11.25 a share today, so again we’re very close to a big breakout.
Volume is tracking very strong for Alon as it has been for the past couple of months. Already more than 600,000 shares have traded today vs. the three-month average trading volume of just 264,000 shares. If volume patterns like this can continue as the stock approaches a breakout, then it will increase the probability for the stock trade significantly higher.
The next areas of significant resistance on Alon sit at around $13 to $16.50 a share. Again, that’s a lot of upside potential from current levels, which makes this stock well worth watching in case it wants to trend significantly higher.
Alon is another heavily shorted U.S. refinery stock. The current short interest as a percentage of the float for ALJ is a rather large 12.4%. The bears have also been increasing their bets on this stock during the most recent reporting period by 18.9%, or around 179,000 shares. If the big money wants to move into U.S. refinery stocks in a big way, then the shorts in Alon could be in for some major pain.
Delek US Holdings
One more U.S. refinery stock that’s very close to breaking out is Delek US Holdings (DK), which engages in refining and marketing petroleum products in the U.S. This refinery stock is uptrending strongly so far in 2011 with shares already up over 64%.
According to Delek’s website, its refining operations are concentrated in Tyler, Texas, with a daily capacity of 60,000 barrels. The company’s Tyler refining operations are the only supplier of a full range of refined petroleum products within a radius of approximately 100 miles. It might not be on the West Coast, but make no mistake about it, Delek will still see plenty of business flow its way to help serve Japan.
If you take a look at the chart for Delek US Holdings, you’ll see that out of all of the refining stocks I have mentioned this one is the closest to a major breakout. In fact, as I write this, the stock has already started to break out above some past overhead resistance at $12.18 a share. Delek is now trading close to $12.30 a share, and big volume is starting to move into this name.
So far today, over 300,000 shares have already changed hands, which is well above the three-month average trading activity of 157,000 shares. The volume patterns today for Delek are a continuation of high volume moving into the stock during the last couple of months. Clearly, oil traders were already starting to position themselves in refinery stocks due to the sky-high crude prices. Now they have even more reason to love these plays as the refining problems in Japan unfold. This is another reason why I think this trend higher for refinery stocks could have some legs for a sustainable period.
The next levels of significant resistance on this stock won’t come into play until around $13 to $16 a share. It’s also worth noting that around 6% of the float is sold short, so a short squeeze could easily be set o this name. I would also point out that Delek has a very small float of only 13.64 million shares, so if the shorts are forced to cover it could exacerbate any move higher.
To see more breakout candidates, check out the Breakout Stocks of the Week portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.