Todays Big Stock: Encana Corporation (NYSE: ECA)

EnCana Corporation is a natural gas producing company. EnCana operates in two divisions: Canadian Division and USA Division. EnCana’s operations are focused on exploiting North American natural gas formations, including tight gas, shales and coal bed methane. EnCana’s operations are primarily located in Canada and the United States. All of Encana’s reserves and production are located in North America. During the year ended December 31, 2010, the company completed the acquisition of various lands and properties that complement existing assets within Encana’s portfolio. Encana’s produced natural gas is primarily marketed to local distribution companies, industrials, other producers, and energy marketing companies.

To review EnCana’s stock, please take a look at the 1-year chart of ECA (EnCana Corporation) below with my added notations:

ECA has created a couple of short-term price levels over the last (3) months. First, the stock has formed a clear support level at $18 (navy). In addition, the stock has also been forming a down trending resistance level (l. blue). These two levels combined have ECA stuck within a common chart pattern known as a Descending Triangle that will eventually have to break one way or another. This is the 2nd Descending Triangle ECA has formed in the last (5) months. In the previous case, you can see the result of the stock’s break down out of the pattern.

Another important point to note is the recent high the stock has formed this past week.  You can see that this most recent high is lower than the high the stock hit earlier in December. What makes this most recent “lower high” relevant is the fact the overall stock market has hit a higher level than it did back in the beginning of December. In short, this stock has been underperforming the market. This could be a sign that the stock is poised to break lower yet again.

The Tale of the Tape: ECA is currently stuck between two very important levels for the stock: The down trending resistance and the $18 support. A long trade could be made on a break above the down trending resistance with a stop placed under the breakout point. On the other side, you could enter a short trade on ECA if the stock breaks below the $18 support level. In that case, a stop should be placed above the level of entry.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT