DNR Stock: These Technical Signals Are Significant
The current bull market that began in the aftermath of the financial crisis in 2008 is now the longest bull market on record. The progressive move toward higher index values, which characterized this bull market, is why I have spent most of my time, if not all of it, looking for stocks that are geared toward higher prices.
The reason is that I prefer to trade with the tape rather than against it. If the markets are moving higher, I have a better chance of success by trading in the same direction the markets are moving in.
That is not to say that stocks do not correct in bull markets, because they do. That is why I am returning to focus on Denbury Resources Inc. (NYSE:DNR) stock. I originally focused on Denbury Resources stock on March 29, 2018, in a publication titled “DNR Stock Is Clearly a Bullish Trend in Development.” At the time, DNR stock was trading at $2.67. It has since appreciated by 56.93%.
The reason for my return is because the indications responsible for generating my bullish view on DNR stock in the first place have now come into question, potentially suggesting that a correction is looming.
The following Denbury Resources stock chart highlights an influential momentum indicator on the verge of generating a bearish signal, which would suggest that a correction is looming.
Chart courtesy of StockCharts.com
This DNR stock chart illustrates that in August 2017, Denbury Resources stock began making a series of higher highs and higher lows. This price action is the quintessential characteristic that defines a bullish trend.
This bullish trend was responsible for taking DNR stock from a low of $0.91 to $4.19 where it currently resides, representing a 360.44% return since the lows were printed in July 2017.
Before this bullish price action even started to characterize the landscape, a bullish moving average convergence/divergence (MACD) signal was generated.
MACD is a momentum indicator that is used to determine whether bullish or bearish momentum is influencing the price action in a stock. Bullish momentum suggests that a stock is likely to appreciate because the path of least resistance is geared toward higher prices. Bearish momentum suggests that a stock is likely to depreciate because the path of least resistance is geared toward lower prices.
Momentum is a very powerful force because a stock cannot sustain a progressive move in either direction unless the applicable level of momentum is supporting it. This is why in July 2017, when a bullish MACD signal was generated, it was the precursor to the bullish trend that developed soon afterward.
The significance of this MACD indicator is difficult to dismiss because the entire time the bullish trend has been in development, the MACD indicator has remained in bullish alignment. It is fair to assume that as long as the MACD indicator remains that way, the move toward higher DNR stock prices will continue.
The problem that has arisen is that the signal lines responsible for creating the MACD signal have converged. Unless Denbury Resources stock starts to appreciate soon, a bearish MACD signal will be generated in the weeks ahead. This will suggest that the bullish trend has run its course and a correction is set to ensue.
The MACD indicator would be just one indicator suggesting a correction is likely to occur. In order to confirm that a correction is in progress, DNR stock would need to break below key levels of price support, which are highlighted on the following Denbury Resources stock chart.
Chart courtesy of StockCharts.com
This Denbury Resources stock chart highlights an ascending channel, which is the price pattern that was used to capture the bullish trend that has been in development.
This ascending channel was created by connecting the peaks and troughs that characterized this bullish trend. The end result was two upward-sloping trend lines that pinpoint where price resistance and price support reside.
This is important information because as long as Denbury Resources stock is contained within these trend lines, the bullish trend remains intact and higher prices are likely to prevail. Breaking below support, which currently resides at $3.75, would suggest that the bearish trend has run its course, opening up the door for a correction to ensue.
This level of price support currently coincides with the level of price support that has buoyed the stock price since May 10, 2018. In order to maintain the price action consisting of higher highs and higher lows, DNR stock needs to maintain its footing above this level of price support, or risk creating a lower low.
These coinciding levels of price support are significant and a break below them, combined with a bearish MACD signal, would indicate that a correction has begun.
I am watching an influential momentum indicator and key levels of price support, because these metrics are in danger of generating bearish signals that would suggest that the current bullish trend in Denbury Resources stock has run its course. This would open the door for lower DNR stock prices to follow.
Check out the original article here.
Author: Patrick Brik CFA, BAS