For the past few weeks, I have been cautioning investors that the market had a high probability of resuming its primary downtrend.

Indeed, the major indices were battered Thursday on heavy volume -- the Dow Jones Industrial Average and the S&P 500 dropped about 3% and the Nasdaq Composite, which had been one of the better performing indices, slid 3.2%.

The main problem is the continued concern by institutional investors of another wave of problems in the financial sector and the lack of a catalyst to drive the market higher. In other words, large buyers aren't willing to commit for any length of time. However, all bear markets eventually come to an end, and that will be the case for this one.

Today I want to step away from that negativity and take a look at a sector that could be in a bottoming process -- the refiners. I continue to be a long-term bull on oil. However, I warned readers of the likelihood of a sharp correction in the oil markets back in May. Even though that has happened, I continue to believe that the correction in oil, oil-service and drilling companies isn't yet over.

That said, the refiners, which have been in a steady downtrend since late last year, appear to be in the process of making a technical bottom. Of course, that bottom will not be confirmed until we see a breakout on solid volume and the price holds above the prior resistance levels.

The one big advantage refiners have over other oil stocks is that they benefit from the drop in oil prices. That's because they buy the crude oil and refine into products such as gasoline or heating oil and profit from what is called the "crack spread," or the difference between what they paid for crude and the price to sell the refined product. So as the price of crude declines, refiners' profits should increase from better margins.

Tesoro ( TSO) has been in a in a steady downtrend over the past eight months, but that might be changing as the price has started to consolidate and move sideways in the last two months. After a stock takes a dramatic drop, such as Tesoro has done, it takes time for the process to reverse. If the price breaks above $20 on increasing volume, it may be a signal that the downtrend has ended.

The second barrier is the resistance level around $30, which could send the price back down to test the $20 support area. If that happens, and the price holds, it could be a good time to add to positions. The bottom of the chart shows that the money stream has started to break out of its range and lead the price higher.

TSO
Click here for larger image.
Source: TC2000

Valero Energy ( VLO) is also trading in a sideways consolidation pattern and may be in the process of building up enough steam to move higher. However, the red trend lines indicate that the stock needs to break through quite a bit of resistance before the primary trend can change from down to up.

If that does happen, investors will want to see a sharp increase in volume along with the institutional money stream at the bottom of the chart moving higher to confirm the breakout.

VLO
Click here for larger image.
Source: TC2000

When stocks begin to form a bottom, it takes time for them to work their way through the resistance levels that have been built during the prior downtrend. Action can be choppy until the momentum builds up. The key of course is to keep protective sell-stops under the bottom of the trading range in case the stocks resume their prior downtrend.
At time of publication, Manning had no positions in stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.

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