Zak Mir on Heritage Oil: After The Good News Overload…

Our dear founder has suggested that I take a look at the current position at Heritage Oil (HOIL). On the face of it he is looking for a charting call, something which I am pleased to do on the basis that the smaller, more speculative explorers are amongst my most favoured area of the market. This is despite, or perhaps because of, the way equities in this area are among the most volatile and of course difficult to predict around. In the case of Heritage Oil it can be seen from the chart that the market would appear to have been anticipating an improvement in the fundamentals going into 2014.

The goodies include a possible dividend payment return, expansion hopes in Nigeria, and preferential tax status here. While I personally might be fearful that geopolitical factors in the region may undermine Heritage Oil shares with very little notice, without such “excitement” as these leftfield activities, there would of course not be the speculative fun!  But at least the latest driver for the shares has been the announcement that production from its OML 30 oil field and which was up 17 percent over the past year, with further gains expected as the field is developed.

However, for those of a squeamish disposition such as myself, there would appear to be comfort in the chart picture. At the same time in looking at the daily chart of Heritage Oil I am reminded of comments made by Mr Jennings that there are times when he really cannot see on what basis my trend-lines are drawn. Normally I would disagree most strongly, arguing that there is usually only one place that a price channel could be drawn. However, in the case of this stock at the moment, there is certainly an element of doubt. What is normally appropriate in such situations is to fit a line to the zone of a chart gap, as this is usually a zone that traders have been caught out, and hence we would then expect to see new support / resistance come in towards this zone.

As far as Heritage Oil is concerned the “best” fit in terms of support looks to be to draw a line from July through the intraday support / latest gap top at 225p from Wednesday 27^th. On this basis, we have a decent risk / reward setup for those who wish to run the stock higher, even after all the gains we have already seen. The best case scenario on offer would be for the top of the June price channel – as high as 285p – to be hit over the next 1-2 months. While the risk (stop loss) being an end of day close back below 210p does not appear to be too painful.

Clearly, the problem that traders have in the near term is that with an RSI reading of 80 plus the shares do need to unwind a very overbought and overstretched position. This presents the problem that there may be temporary probing to the downside to flush out weak holders. After such a strong bull run here it would appear then consolidation and tree shaking can be expected but, in my book, one cannot fail to argue that this is a resolutely bullish chart on a medium term basis. 

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