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Chart of the Week - April 20, 2009

 PNOC Energy Dev. Corp. (EDC)

EDC Weekly Chart - Established Resistance at 4.50 but Trying to Hold Above 3.00 

charts are courtesy of Metastock

EDC Daily Chart - Rallying from its Trough at 3.20

charts are courtesy of Metastock

Legend: blue lines - range for Tsupiteros

            dotted blue lines - range for Position Traders

            red lines - important trend lines

I guess a lot of people got stuck with PNOC Energy Dev't Corp. (EDC) because of the swiftness of its decline from 4.50 to 3.15. I think this is the perfect example of "being complacent can kill you in the markets". For the last couple of weeks, the stock has been going up steadily everyday because of rumors that Marubeni, a large Japanese company, will be buying into the stock at a premium. Last Monday, news came out stating that the Ayala group is also interested to buy into the company. This wasn't the sort of news that the market was expecting that could make the stock decline. However, the stock did sell on that news and the Ayala group declined the rumor later on. I don't exactly know why the market sold off on that news but it was said that the rumor on the Ayala buy-in indicates that the deal with Marubeni might have been called off. Up to this point, the market is still moving on these rumors and have no confirmation yet on what is true and what is not. Let's see how the stock looks like on a technical basis.

The weekly chart shows that the decline of the market from its peak at 4.50 was but a natural phenomenon. Why? Because, as you can see in the chart above, the major resistance of the stock is at the 5.00 level. By forming a peak at 4.50, people were merely anticipating this resistance line and sold ahead of the pack. Furthermore, since the stock has been going up for quite some time already, the resistances are not only coming from those who got stuck at higher levels but also from those who are taking profits from lower levels. At this point, the stock is now trying to hold above the psychological 3.00 level. While the stock has indeed exaggerated to the upside, I believe it has exaggerated as well to the downside by dropping back down to as low as 3.15 in a very short period of time.

Let's examine its short-term technical picture by looking at its daily chart. You can see in the daily chart the massive decline that it did in the early part of the week. In hindsight, it would now seem that the stock has formed a trough at the 3.15 level. However, given the swiftness of its decline from 4.50 to 3.15, a lot of people are currently stuck at higher levels and are just waiting for prices to move up before they start selling. I don't think there is any chance for the stock to move back up anywhere near 4.50 anytime soon. However, if you look at the Fibonacci retracement levels in the chart above, a best-case scenario of 4.00 may be possible. Once this rally is over, I expect prices to merely consolidate here between 3.15 and 4.00 for now.

So how do we trade this stock? For Tsupiteros, I would suggest to simply range-trade the stock for now by buying as close to 3.15 as possible and selling as close to 4.00 as possible. For those who are currently stuck at higher levels, I would suggest to try and sell into this current rally of the stock. Once this stock makes a lower high, which I'm pretty sure it will, you just can never know whether prices will hold above 3.15 the next time it drops back down. As for Position-traders, you have two options, you can either buy as close to 3.00 as possible and just place mental stops on the break below that level, or, you may just wait for prices to bottom-out first before attempting to buy. At this point, it's just too early to say whether prices have indeed already bottomed out at 3.15 already. While it may have bottomed out at 3.15 in the short-term, it is not a confirmed bottom in the medium-term as there is still the possibility of prices piercing below that level the next time the stock forms a lower high. Just remember, whatever happens the stock should no longer break below that 3.00 level. If, for any reason, the stock fails to hold above 3.00, the stock could once again be vulnerable to another lower low. In the meantime, expect the forces of the bulls and of the bears to slug it out for now.

Notes:

Short-term Traders/Tsupiteros vs. Medium-term/Position Traders: Recommendation for short-term traders or Tsupiteros are meant to be used by traders whose holding period are limited to one day to two weeks. Medium-term or position traders are meant to be used by traders whose holding period are two weeks to three months. Long-term investors whose holding period is more than three months should not follow these recommendations.