Are The Refiners Under Accumulation?

Commentary: Accumulation and distribution are often hard to discern on a chart. It typically takes institutions several days or weeks to unwind or accumulate positions due to the sheer numbers involved. As such, it is always in the institutions' best interests to hide their intentions and actions to prevent other market participants from taking advantage of the situation. However, institutions can't truly hide their intentions as price charts record the culmination of every buy and sell transaction.

The easiest way to spot this is to just watch for lateral consolidations with a large increase in volume. There are indicators that can be plotted on a chart to simplify spotting this behavior, such as volume weighted average price (VWAP) and volume by price. Volume by price plots volume on the left side of the chart based on the price where shares traded instead of the date.

You can see what the volume by price indicator looks like in the chart of Valero Energy Corp (NYSE:VLO) below. Notice the huge increase in volume in the $17.50-$20 area. The price dipped below this area a few times but quickly reversed. Notice how price moved sideways throughout this period of high volume without advancing or declining. Instead, VLO built a base, which it recently broke out from. Once it was able to move above the large volume area, it began trending versus churning.

Holly Corp (NYSE:HOC) is another refiner that has had a huge increase in volume as price moved laterally. It has been building a reverse head and shoulder base for the better part of three months and is just starting to emerge above the price-by-volume bars and the neckline of the pattern. If it can follow through above the recent high, it could ignite a sharp rally higher.

Marathon Oil (NYSE:MRO) looks much like VLO, with prices starting to set higher pivot highs after clearing the large price-by-volume bar. Due to the large number of shares traded in this area, many sellers now find themselves regretting their decision, and could be waiting for any dip into this area to buy back. This is how bottoms are formed, as traders who missed the move begin supporting the stock at prior prices.

It's amazing how eerily similar many charts look in the same sector. Petro Canada (NYSE:PCZ) is trading in the same fashion as the other refiners, with price clearing the first level of resistance and above the largest of the price-by-volume bars. Buyers appear to be returning on the test of support, and PCZ could be ready to challenge for a breakout.

It seems counter-intuitive that oil refiners would be under accumulation while oil has been under constant pressure. It could be that crack spreads are improving, or that the smart money foresees an improvement in the refiners' margins. However, the reason is not as important as the simple fact that someone is buying here. Technical analysis attempts to remove the guesswork from why participants are acting in a certain manner by objectively showing the price action. The charts are suggesting accumulation by someone, and it really shouldn't matter why?