Refiners Struggle on the Comeback Trail

 | Jul 15, 2013 | 12:00 PM EDT
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After beginning the year on a strong note, petroleum refiners have been taking a hit over the past several months. And the popular refiners Tesoro (TSO) and HollyFrontier (HFC) have the bulls wondering if it's time to buy the dip.

The opinions from a fundamental standpoint have been mixed, and the negative earnings growth so far this year has not helped the case for the bulls, so today I'm heading to the charts.

Tesoro, together with its subsidiaries, engages in refining and marketing petroleum products in the U.S. It operates in two segments: refining and retail. As of the close of trading on Friday, shares were up 25.31% year to date.

TSO Weekly

Between the two companies, Tesoro has had the stronger year. It hit a 52-week high in March before pulling back on the daily time frame, but it established a higher high in May. The recent correction has brought shares back into the support near April's lows, a level that also corresponds to the 38.2% Fibonacci retracement of the breakout uptrend that began just over a year ago.

The current daily correction is experiencing signs of downside exhaustion. It has had two waves of selling, each consisting of two smaller waves, thereby completing a typical corrective move. The momentum on the final wave of daily selling was also slower than the prior wave, indicating a shift in momentum, which can be very positive if you're a bull. So far, the bulls agree. Tesoro has held the support, and on Friday it hit a new high for the month.

But despite the short-term exhaustion and near-term bounce, the longer-term outlook concerns me. Tesoro retested the zone of its all-time highs in May. The overall rally back into those highs took four and a half years, whereas the selloff took less than two. Despite the increase in upside momentum in recent years, breaking through such a strong resistance level on the first try is rare on this type of monthly price development.

The slightly higher high on the monthly time frame this year does not help the bulls' case in Tesoro. Stalling just shy of the prior high to begin the year made it even more difficult for the stock to push through that level on the second test and will make it improbable if it attempts to do so a third time this year.

HFC Weekly

Like Tesoro, HollyFrontier operates as an independent petroleum refiner and marketer in the U.S. As of the close of trading on Friday, shares were down 7.54% year to date.

Also like Tesoro, HollyFrontier has been facing downside exhaustion on the daily time frame. It turned lower earlier this year than Tesoro did, pivoting off highs in early March. A two-wave correction off those highs landed it at support in mid-April. This two-wave selloff is very similar to the one that has taken place more recently in Tesoro on the daily time frame. I've marked this comparison in the charts below. HollyFrontier, however, continued to struggle throughout April and May while Tesoro made new highs. It broke down into June with a strong continuation pattern and has retraced 50% of its 2012-2013 rally.


On the smaller time frame, the outlook is better for both of these refiners. Swing traders will have the daily trend exhaustion and monthly support in their favor, although they will risk being flushed out on possible retests of those lows. This "flush" is common after a two-wave corrective trend where the momentum is average to stronger than average on the downside.

Both HollyFrontier and Tesoro will face the constant threat of resistance as they climb back to the prior highs. The trend placement on the monthly time frame makes it very unlikely that either will succeed in strongly breaking through without first pulling back on the weekly time frame once again. Nevertheless, both have a decent chance to retest the zone of those highs.

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