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An oil drilling rig in the oil fields of Wyoming. (iStockphoto / Getty Images)
An oil drilling rig in the oil fields of Wyoming. (iStockphoto / Getty Images)

Schizas‘ Mailbag

Time to take some profits with this small-cap energy producer Add to ...

Hi Lou,

I got into Rock Energy at $0.96, and it’s taken a nice run, but I’m wondering if I should be taking profits or staying on this ride?

Thanks,

Matt

Hey Matt,

Thanks for the assignment.

This will be the second time that I study the case for Rock Energy Inc., a small-cap heavy oil producer with operations in Western Canada. The first analysis was conducted on March 1, 2013, on a request from Robert who identified that increased production could get the company out of the penalty box. The shares were trading for $1.31 a share and the research conducted on Robert’s behalf highlighted that the downtrend had been broken and that a cup and handle pattern had formed indicating that there was potentially more to the advance.

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In retrospect that is exactly what happened. The shares added to the advance trading briefly above $3.50 in October of 2013. Another examination of the charts will provide further support for my thoughts.

The three-year chart depicts the trend reversal that caught fire in late May as the shares bounced off support along the 200-day moving average. As we got into early October of 2013 the RSI and the MACD both generated buy signals as the stock caught a lift off $1.80. What became evident as we progressed through October was that the stock got overbought and the momentum indicators both turned lower suggesting that some investors were taking profits.

The six-month chart provides a close-up of the resistance that came in at $3.60 and led to the retreat back below $3.00 by early November. Currently the shares are trying to hold onto a thin ledge of support at $3.00. When a stock makes an aggressive move higher, as in this case doubling in a month, it often does so without building support along the advance. If $3.00 doesn’t hold the shares may have to retest support at $2.40.

Given that you are currently deep in the money on your investment I would recommend taking some profits while they are available.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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