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Buy This Energy Stock's Breakout for Potential Double-Digit Gains

Thus far, September has brought a little upside in U.S. stocks and marginal increases in the daily trading ranges, i.e., more choppiness.

The Energy Select Sector SPDR (NYSE: XLE) is slightly outperforming the broader market, up 1.6% so far this month compared to 1.4% for the S&P 500. Of course, one week does not make a trend, particularly a Labor Day shortened trading week that also included a major Jewish holiday and ongoing headlines from the G-20 meeting. However, the relative outperformance combined with a friendlier looking chart makes the energy sector an interesting place to dig for long-side candidates.

XLE continues to grind higher through a series of rallies and consolidation phases that pull back to the uptrend line that dates back to June 2012. The most recent retest of that trendline came in late October, which also qualified as another higher low. 

Since then, the ETF has worked its way up toward the 2013 major resistance line just shy of the $84 mark. An eventual push past this line would be bullish and a continuation of the series of higher lows and higher highs.

XLE Chart

One stock I like in this group is National Oilwell Varco (NYSE: NOV), a provider of equipment and components for oil and gas drilling operations, which makes up roughly 2.5% of XLE.

Last week, the stock broke past a 10-month resistance zone with force. Traders shouldn't necessarily chase it, but this important breakout combined with broader sector support makes NOV an attractive long-side candidate.

On its weekly chart we see that NOV remarkably still holds its 2009 uptrend line, which most recently was successfully tested in May before the stock bounced higher again. After a volatile period that stretched from October 2010 until late 2012, the stock then settled into a consolidation phase, trading in a relatively tight pattern as it retested the 2009 uptrend line.

All of this eventually led to last week's significantly bullish breakout candlestick. I find that a tight trading pattern leading up to a breakout adds credibility. 

NOV Stock Chart - Weekly

On the daily chart below, the buildup to last week's breakout move is easier to see. After spending much of 2013 below its 200-day simple moving average, NOV pushed back above it in July, an initial sign of strength. 

After a successful retest, it pushed back above the moving average and spent the month of August exhibiting relative strength and establishing a higher low. Thus, last week's breakout wasn't surprising to traders watching the chart closely.

While the breakout did come on an uptick in volume, there wasn't a massive spike, which is something to keep an eye on just in case the bears want to pounce.

NOV Stock Chart - Daily

NOV may be somewhat overbought in the immediate term, but a retest of the breakout level at $76 could offer traders a good entry level.

Recommended Trade Setup:

-- Buy NOV on a pullback below $76
-- Set stop-loss at $72
-- Set initial price target at $85 for a potential 12% gain in 5-10 weeks

Note: Learn more about the strategies Serge Berger uses to create a profit in the market every day. Download his trading plan in the "Essence of Swing Trading" eBook by clicking here.