LyondellBasell Facing Volatile Moves

 | Aug 02, 2011 | 1:00 PM EDT
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LyondellBasell Industries (LYB) manufactures specialty chemicals and polymers used for a wide variety of applications across multiple sectors.

On July 29 the company reported earnings of $1.49 a share, $0.23 ahead of analyst estimates. The report, coupled with positive comments by the CEO on the outlook for the rest of the year, powered the stock price higher and through a three-month downtrend line. UBS raised its estimates through 2011 Monday on the strong earnings and reiterated its $47 price target and "buy" recommendation.

Shares of LYB climbed 200% from the June 2010 low to the May 2011 high before pulling back to the 38% Fibonacci retracement level of the rally. Support was also provided by the 200-day moving average, which contained the June and July lows.


LyondellBasell Industries (LYB)


The three-month downtrend line and a series of higher lows made since the end of June, coincident with the 200-day moving average, can be seen clearly on the daily chart. The converging lines helped to narrow the range and compress the Bollinger bands. This is a condition that often precedes volatile moves. Friday's price action tested the support line and bounced strongly higher closing above the 50-day moving average and in the upper Bollinger band range but just below resistance. It dropped briefly below the 50-day average in trading on Monday but finished higher penetrating and holding above the downtrend resistance line.

The RSI has been flat and oscillating around its centerline for most of the consolidation reflecting the lack of direction and momentum. It is currently above its centerline and the 21-period signal average. Stochastics and the MacD have moved above their centerlines and are tracking higher. Volume moved above its 50-day moving average over the last two sessions confirming the price action. Chaikin money flow is above its 21-period signal line and pointing to accumulation and the money flow index, a volume weighted RSI indicator interpreted like the RSI of price, is above its centerline. The strong price action off the earnings report and the resulting breakout are being confirmed by the short term price momentum indicators and money flow and volume.

LYB has a close correlation to the S&P 500 index and the oil index and the iterations macro events have had on those indices. As with many stocks price action going forward will be subject to their tidal influences. Caution is always the watchword in turbulent markets and certainly is in the current one. The trade in LYB is to wait for a second confirming close above resistance. It should be a strong close above the opening price and in the upper daily range.

Ideally, it would be above the minor support line in the $40 area and be accompanied by volume above the 50-day moving average of volume and continued positive money flow.

Often breakouts are retested and the stop level needs to account for that possibility. Initially, it should be placed under the 50-day average of price and triggered, if possible, on a daily close below that level. Position size should be adjusted to allow for the potential 2.5% loss. If price begins to trend higher the stop should be reconfigured to trail the 50-day moving average. If on the other hand, price were to move quickly into the $44-$45 area the profit should be booked in anticipation of the necessary reversion back to the 50 day moving average and reset of the trading parameters.

LYB is a solid performer in a hot sector but capital preservation is the key to successful trading and requires strict adherence to a trading plan

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