Energy stocks are at the forefront of a big day on the Aussie stock market. The sector is up 2.6% this morning as bargain hunters chase value among beaten up oil and gas stocks

Santos is amongst the most leveraged of the major oil and gas stocks on the Australian exchange. It’s been dealt with harshly as the oil price fell so may have one of the better bounces as the oil price rallies. A break above the December high at $8.52 would complete a double bottom chart pattern suggesting potential for the current rally to extend.

All that said, the size and speed of the turnaround in oil prices over recent days creates its own risks. It has the smell of short covering.  While US producers look like cutting production in coming months, Opec is pumping hard. A smaller surplus as opposed to a balanced market might be the most realistic expectation for the oil market for a while.  If that's right, any ongoing rally from current levels in oil prices is likely to be limited. This will in turn cap the recovery in energy stocks

This line of logic leads me to look at potential chart resistance levels for Santos shares. Here are 3 possibilities:

  • $9.05 which is a 38.2% Fibonacci retracement of the latest decline  and a possibility for a measured ABCD move ( CD = AB x 1.27)
  • $9.60/9.75 – 50% retracement and also a measured ABCD target ( CD = AB x 1.618)
  • $10/10.20 – July 2012 lows (dashed line) and price gap

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