Devon Energy (NYSE:DVN) is a stock I want to revisit as it is one that I’ve had on a watchlist and which has come a long way from the lowly days of $10 per share. The level at which it first sparked my interest came as it approached the $27 to $28 per share area on the daily chart, at which point it went into congestion.
Congestion zones, and their importance, have been highlighted by me many times before, not only for stocks but also for any other market regardless of whether you trade intraday or longer-term. The principles and practices are identical in that all that is required is patience. And generally, such patience is rewarded since congestion phases are where trends are born.
In my books, I liken them to the salmon spawning grounds at the head of a mighty river where the small fry grow before returning to the sea to develop into mighty fish. The other point about congestion regions is the strong levels of support and resistance which develop around the VPOC (the yellow line) of price agreement. For Devon Energy, it was at $28.80 per share which was resistance as denoted with the blue dashed line of the accumulation and distribution indicator which proved pivotal at $31 per share.
The breakout occurred on the 23rd of September with a solid up candle on good volume and with low volumes ahead on the VPOC histogram, this also opened the way to a steady and even-paced rise towards the $40 per share area where once again we have a congestion phase building.
And this raises a further point. Once the volumes on the VPOC histogram exceed those at $29 per share, then the VPOC itself will move higher to this new level and develop in the same way as before, with support and resistance levels added. During this current period of price action, we have seen some weakness with efforts to rise on falling volume, but yesterday’s price action was positive and looks to be testing a breakout level at $42 per share.
However, in order to establish a possible upside target, we need to zoom out and move to a slower timeframe which in this case is the monthly timeframe.
What is immediately clear on this chart is the relatively strong price-based resistance which now waits at $46.50 per share and is denoted with the red dashed line. Note how in the past this level has prevented the stock from moving higher on at least 3 occasions, so it is a key level to watch.
In the short term, we do have a little way to go before hitting this level, but once there, any further advance will require good volume if it is to be breached. If it does, the stock could even return to the heady days of $70 per share as the volume falls away dramatically on the VPOC histogram. This will give the price a free run as there is little in terms of technical obstacles to overcome on its journey north.