Energy stocks with long-term upside potential

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What are we looking for?

Energy stocks that have long-term upside potential, based on four technical indicators.

The screen

We limited our pool to the energy stocks in the S&P/TSX composite index.

To find the most promising, we looked at each stock's moving average. This is the average closing price for the stock over a recent period, usually the past 10 weeks (10wMA) and past 40 weeks (40wMA). Charting the moving average week by week gives us a sense of investors' behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock?

We started by selecting only those stocks that are above both their 40wMAs and 10wMAs. We then narrowed our search by choosing only the ones with positive stochastic and on-balance volume (OBV) indicators.

The stochastic indicator measures investor activity. It looks at today's range (defined as today's high minus today's low) and compares it with the average range of the previous five days. A positive signal is generated whenever today's range is higher than the previous five days' average. This suggests that buyers are willing to pay more for the stock than they did during the last five days and shows a positive trend.

On-balance volume (OBV) is used to detect momentum. Volume should keep pace with price; each $1 rise in price should be accompanied by a commensurate rise in volume. A rise in price on lesser volume would suggest a negative signal for the stock.

What did we find?

We found four stocks that satisfy all four criteria and 17 others that had three positive readings, suggesting a possible small correction before the resumption of their up-trend. In the adjoining table we summarize our findings.

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Ron Meisels is the Director of Research and Monica Rizk is the senior Technical Analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.