Technicals Target Rally in This Unloved Stock

I’m going contrarian with today’s pick: oil refining stock HollyFrontier (NYSE: HFC).

In the words of 18th century British nobleman and banker Baron Rothschild, “The time to buy is when there’s blood in the streets.” That has become the mantra of contrarian investors. When everybody is selling something, prices become cheap as selling pressure dries up and any spark in demand can light a fire to propel prices significantly higher.

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Right now, the energy market is on everyone’s mind as the media is bandying about the dreaded words “bear market.” Oil prices met the 20% decline threshold for the commonly accepted definition of a bear market this past week.

The question for traders is whether the market is done falling and this is time to actually step in and buy. Because low prices can certainly head even lower.

That is why we need investor mood surrounding the market or stock in question to become very negative. When that happens, we presume that everyone who wanted to sell has already done so, and with supply down, demand is just waiting for a spark.

Sentiment surrounding energy stocks is certainly negative. An oil supply glut, falling U.S. rig counts, OPEC’s refusal to slow pumping and a less-than-robust economy give fundamental analysts plenty of fuel for their bearish case. On the technical side, energy stocks have taken a beating on the charts over the past few weeks, and oil refiners have been falling for the better part of nine months.

HollyFrontier broke down in December 2015 at roughly $46 and fell to a low near $22 last month, a loss of more than 50%. But with oil prices falling again and the sentiment surrounding the group extremely bearish, it looks like it’s time for contrarians to step in again.

Before the bell, HollyFrontier reported adjusted earnings of $0.28 per share, below analysts’ estimates of $0.32. However, revenue for the period was $2.71 billion, exceeding the $2.42 billion forecast. The stock sold off in pre-market trading, but rebounded after the market opened.

HFC has a trailing price-to-earnings (P/E) ratio of 9, which is 25% below its five-year average, and offers a dividend yield of more than 5% in a world where investors now pay governments for the privilege of holding their debt. Both of these facts are enticing, as is the fact that the stock is overwhelmingly in institutional hands, and they are supposedly the folks in the know.

On the charts, HFC has climbed more than 15% in the past four weeks, which is hardly enough to declare a bull market. But we do not need a bull market. Riding an upside correction in a bear market, as long as the risk-to-reward ratio is solid, can be very lucrative.

HollyFrontier could run another 15% without even breaking its bear market trendline. Therefore, my contrarianism is not exactly radical… I’m just looking for an upside correction.

Note: A former child prodigy turned an even smaller move in another oil refiner into a 90.5% gain in just over two weeks using an amazingly simple strategy. He’s agreed to share his technique with traders here.

Rising momentum indicators support this case, showing bullish divergences with price action. The Relative Strength Index (RSI), for example, bottomed in May even though price continued to slide into July. Price usually follows the indicator — up in this case.

On-balance volume is also rising, and while not in a bullish divergence, it does suggest that there is demand for the stock despite the headlines.

Finally, a short-term moving average crossover system is about a day away from signaling a buy. When these averages cross at about the same time, the pattern left on the charts resembles a bowtie, a name coined by trader Dave Landry. It is a good system for identifying the start of short-term trends.

The bottom line is that the sentiment surrounding HollyFrontier is poor, while the technical evidence points to a continuation of the current run higher. The chart is singing a lovely, although likely short-lived, song. But contrarians can use it to book a quick double-digit profit.

Recommended Trade Setup:

— Buy HFC at the market price
— Set stop-loss at $24.25
— Set initial price target at $30 for a potential 15% gain in six weeks