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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
This one commodity powers almost everything in our daily lives, and without it we’d be in trouble.
That commodity is oil, and we’ve followed it closely over the past month. It’s a vital part of the economy, and thereby the markets.
That’s why I check it every day and why I write about it so often.
The ETF we’ve used to monitor oil is the Energy Select Sector SPDR Fund (XLE). When we first looked at XLE in July, it had just rebounded lower from a resistance level of $56.
Back then, we looked at how when a stock falls below a support level, that level can turn into a resistance level. And that’s exactly what happened with XLE.
Then last week, we looked at how after falling to $46.30, XLE rallied before running into a shorter-term resistance level. This time, at just over the $50 level.
This provided two potential trading opportunities…
First, if XLE broke above shorter-term resistance, it could quickly rally back to the $56 major resistance level.
On the other hand, if XLE broke lower, it could fall much further – just like in June and July when it fell around 15%.
I love it when this type of price action plays out… It offers the potential for a profitable trade in either direction.
Check out the price action in the chart below to see how it played out…
Source: eSignal
To recap, the top dashed blue line is the major resistance level at just over $56. The dashed red line represents the shorter-term resistance level at just over $50.
You can see how XLE has broken lower over this last week. XLE has also recently traded below its previous low back on July 19. We know that a “lower” low is a sign of a bearish trend.
So, what might happen next?
To help piece it together, I’ve added two key indicators to our chart.
First, on the price chart are two moving averages (MA). The red line represents a shorter-term 10-day MA. The blue line is a longer-term 50-day MA.
You can see that the 50-day MA has rolled over and is now trending down. The 10-day MA has also crossed down over the longer-term 50-day MA…
Both of these are bearish signals.
Under the chart, is one of my go-to tools – the Relative Strength Indicator (RSI).
The goal of the RSI is to gauge momentum, and it lets me see whether a stock is overbought or oversold.
On the chart, I’ve placed an ‘A’ where the RSI most recently showed XLE to be oversold. As you’ll note, this coincided with the previous low on July 19, before XLE rallied.
Right now, the RSI could again test that “oversold” territory labeled as ‘B’.
That is why the upcoming week’s price action for XLE is key. And I’ll be watching it like a hawk.
If the RSI shows XLE is oversold, I’ll look to see if it can bounce. A failure to bounce off an oversold RSI level will likely only add to the bearish sentiment.
Meaning, a heavier fall in XLE could be even more likely in the weeks ahead.
The bottom line is that I’d recommend keeping an eye on where XLE will soon be heading. History and experience tells us there’s always something happening in energy and energy stocks.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
I’m excited to hear from so many of you who’ve been enjoying my Trading With Larry Benedict e-letter…
Fantastic! As Dave Ramsey would say, it’s obvious Mr. Benedict “has the heart of a teacher.” Good stuff! I’ve been trading Forex for 15 years, but I’m new to the world of options. I currently earn my living day trading Forex and plan on using options trading for retirement planning. Keep it coming. Thank you.
– Jared S.
Love your letter! It makes a lot of sense. Thank you, Larry.
– Dale J.
Hi Larry, I think the newsletter is really great. It’s so informative and right on. I look forward to reading and learning from it daily. Thank you for your effort and help.
– Daimon C.
Hello Larry, I love, love, love reading your e-letter. You manage to explain things in such a simple way that even I can understand. I read them every morning, and I learn. I’m also getting closer to becoming a more involved member of your services. Thanks a lot!
– Yana R.
I’ve always been interested but never knew enough about it to get myself involved. I used a trader once, and he did it all for you. But he took the money and didn’t really explain enough. I made money but ended up losing everything, so I’ve been very skeptical.
But I admire what you do and I’ll read up more, thank you. Kind regards.
– Graham E.
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