Bulkowski’s Trade in National Fuel Gas

Written and copyright © 2009-2010 by Thomas N. Bulkowski. All rights reserved.

After doing research on the company, I liked the protection of a nearly 4% dividend with 60% of revenues coming from the utility side of the business. Fundamental ratios were tempting, making it a decent value play, too.

Insider Transactions

Four insiders bought and 2 sold since May 2008, but in small amounts.

Insider buying is an important ingredient in my stock selection. If I am wary about a stock, seeing lots of insider buying will push me over the edge into buying the stock. I feel that if they have a stake in the company and the stock drops, they will be feeling the pain right alongside me. I also know at what price they found the stock to be of value, and that goes for the sell side, too. If I see insiders selling at 30, you can be sure I will consider selling near that price.

The Buy

When the stock broke out of an ascending triangle, I bought and received a fill at 32.90.

A volatility stop at 30.27 would protect my backside. The upside target was 47, according to my trading notebook. However, I adjusted that target lower to 38-41, based on overhead resistance dating back to valleys in March and August 2007.

The stock threw back and dropped below my buy price within weeks of purchase, reaching a low of 30.56, which was still above the volatility stop. Then it began moving up starting at A

At B, it formed an Adam & Adam double top (tops B and E), which looks weird in the picture because the second peak is not as high as the first, but price didn't drop much below the confirmation price (the valley immediately to the left of C).

Time to Sell?

Then price began rising again, following in the footsteps of the general market. At D I started thinking of selling. Why? Because price had reached my 38-41 target. A check of the numbers showed a measured move up chart pattern had completed, too.

Where is it? It begins at A (30.56) and rises in the first leg to B (37.61) for a height of 7.05. The corrective phase took price down to C at 33.77 and the second leg took price up to D, at 40.87, for a second leg height of 7.10.

The first leg had a height of 7.05 and the second topped out at 7.10, just as theory predicted.

Let's turn to the candle patterns now, which you can find in my Encyclopedia of Candlestick Charts book pictured on the right.

I show the two candles at D, the day before I sold, in the inset on the chart. The first candle line has a tall upper shadow and no lower one. It is not a belt hold because price trends upward leading to the candle and not downward. It is an opening white marubozu candle perched atop 8 new price lines. Both candles (marubozu and new price lines) are continuation candles, according to my tests. The second candle pictured in the inset is a closing white marubozu which is also a continuation candle, but just 55% of the time. In other words, it acts randomly. Notice that it did not make a higher high.

Sell Setup

Here are the reasons for the sale.

• The candles were overlapping and seemed to be struggling to go higher;
• The stock completed a measured move up chart pattern;
• The stock had reached overhead resistance;
• Quarterly earnings were coming and likely to be soft; and
• The stock had hit my 38-41 target.

I placed a sell order to be executed at the market open, but then checked the quotes 10 to 15 minutes before the open. The bid was at something like 36 and change and the ask was 44+. I did not want my order to execute at 36, so I day traded the exit. That means I watched my profits drop minute by minute as the stock moved lower until I felt the downtrend was set. I sold and received a fill at 40.54 for a net gain of 22.6%.

Does this mean the upside is over for NFG? I have no idea. Price could continue rising and that would be fine with me because I no longer own it. I am shopping for new opportunities.

Aftermath

At the time, the strong move up in July was the right time to be in the stock. When it paused at the top of the straight-line run, it seemed a good opportunity to take profits, which I did, as the chart shows.

Now that more time has gone by, you can see that selling was a mistake. The pause began the corrective phase of a measured move up chart pattern, but it could just as easily have been a peak and price tumbled.

While I regret selling, it seemed like the safe and best decision at the time.

-- Thomas Bulkowski

Written and copyright © 2009-2010 by Thomas N. Bulkowski. All rights reserved. Down with categorical imperative!