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Small Cap's Breakout Could Spark a Double-Digit Rally

With the price of gasoline at the pump below $3 per gallon in several states, it's logical that oil stocks would be hurting. Indeed, the sector has had a rough 2013 to date.

 

But things appear to be changing, and many stocks in the group have been rallying for several weeks. One of the smaller members by market capitalization, Northern Tier Energy LP (NYSE: NTI) bottomed in September, and since then, has taken down several technical barriers. In fact, there is just one more left between it and another big leg higher.

NTI Stock Chart

To be sure, NTI has already experienced a huge rally percentage-wise from the depths of its 2013 slide. However, putting that in context, it has only regained roughly one third of what it lost. More advanced chart watchers will note that the September-November gain was a 38.2% Fibonacci retracement of the decline.

While it is great to have advanced analysis such as Fibonacci retracements in play, the rally stopped at the more important resistance level set by several turning points earlier this year. It was also the site of a downside breakaway gap in August.

The $23.60 area provided support for the stock during its 2012 rally, and again during its 2013 decline. We know from decades of study that former support and resistance levels often come back into play later, and that seems to be the case with NTI now.

As for gaps, they take place when supply and demand get so out of balance that the stock must jump from one price level to the next instead of trending smoothly. That leaves a space, or gap, on the chart. Gaps involve a lot of emotion, and the market remembers that in the future as support and resistance.

NTI paused at $23.60 late last month. Although it stopped rising, the bears could not take it significantly lower, and that suggests resilience. Further, with the exception of two days, volume remained low as is usually the case when a rising trend is resting.

If the stock can pierce the $23.60 level, it will tell us that demand is back. On the chart, there is no significant resistance until about $27.40, set by several highs made during the past year. Adding to its importance, this is also the 68.2% Fibonacci retracement of the 2013 decline.

To sum up, if NTI breaks through resistance at $23.60, it would have a good shot of reaching $27.40 in about two months' time for a 17% gain.

Recommended Trade Setup:

-- Buy NTI on a break above $23.60
-- Set stop-loss at $22
-- Set initial price target at $27.40 for a potential 17% gain in two months