By L.A. Little of Technical Analysis Today.
reported earnings Thursday, showing a top line decline of $55 billion in revenue. The stock opened down just over $1, but worked its way higher (with the help of the strong energy sector advance) to close in the green. Today the stock was definitely weaker than the general market, but will that continue?
In a Large Trading Range
When I look at the intermediate term trend, it is sideways. XOM continues to trade within the large trading boundary with the borders at roughly $75 on the top and $64 on the bottom. That represents an $11 range from top to bottom, or about a 14%-to-16% swing.
On a short-term timeframe (see chart below), the trendline was broken with yesterday's trade. After 14 days of advances with only four days of small percentage declines over the past week, a break of the steep trendline isn't a huge surprise. The majority of stocks that trade higher into earnings are selling off on earnings announcements this earnings season.
A more important takeaway from the short-term chart is that the risk on a short trade is much less than the potential reward. You have two technical events and one fundamental one that, when taken together, all suggest a potential short-term short trade. You have resistance now in the form of a trendline break/retest. Add that to resistance poised by the horizontal channel line and a fundamental sell the news reaction to earnings.
Energy Sector Influence
The influence of the energy sector should be examined as well. Here are the short- and intermediate-term charts of
XLE Energy Select SPDR
. On the daily chart (shown below), there is a "confirmed uptrend" in place. (For definitions of my technical terms, click
As XLE traded above its prior swing point, it did so with volume expansion. This shows us that, on a short-term timeframe, there were eager and willing buyers at higher prices. As prices pulled back this past week, volume diminished into the breakout area of $56. That stopped the selling and XLE turned to head back higher.
Looking at the weekly chart (shown below) though, the picture is a bit different. There we see that, on an intermediate-term timeframe, the trend is "bullish but suspect." Suspect bullish trends can go higher, and this indeed might, but they are always warning signs until corrected.
Viewed visually through the lens of "The Trading Cube," the relationship of time and trend for the stock, sector and general market appear this way:
The Trading Cube tells you that if you intend to trade XOM from the long side, you have to keep your timeframes short. If you are considering a longer-term trade, then the short side is more appealing at this point in time.Having said that, the best trade is the range trade for now -- shorting near the top (where we are now) and buying near the bottom. If you take that trade, though, you should concentrate on trading a shorter-term time frame and with a smaller position size. Why? You have to respect the fact that the short-term timeframe shows confirmed bullish for both the stock and the sector.
You are trading against the trend in the timeframe you are trading. The trade will falter if XOM breaks out of the trading range, and it is what you have to guard against with such a trade.
To consistently make money, you need to do a lot more than just find good trade setups. Among other things, you have to mix in good risk and good money management techniques; scale in and out of positions appropriately; and exhibit a lot of patience and conviction in your trades. Many trades will falter regardless of whether you are a fundamentalist or a technician. How you handle your failures will define your success.
So, until next time, keep trading the charts!
L.A. Little is an author, professional trader and money manager who writes daily on
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