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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… |
In late July, I discussed what I believe is the most important commodity in the world – oil.
And right now, I think it’s moving towards a critical point, where anything could happen.
That’s why I watch oil every day – it’s a crucial part of the economy and the markets.
In fact, it’s the first chart I look at each morning right after the S&P 500.
Back in July, we looked at a chart of the Energy Select Sector SPDR Fund (XLE) – an ETF that represents the energy sector.
Since then, XLE has developed a promising chart pattern which I’ll focus on today.
First, let’s take a look at a five-year chart of the XLE…
When we first looked at oil in July, I wrote about the importance of key price levels. With XLE, it was at a price level of around $56, which has been a key level dating back to 2016.
Up until COVID-19, each time XLE traded down to $56, that level brought a new wave of buyers into the market.
However, as we discussed, once a stock price moves below a support (price) level, that same level can sometimes change into a resistance level – bringing in a wave of sellers.
This happened to XLE throughout June. Having traded up to that resistance level (red arrow), XLE fell around 15% – a considerable move.
Now, to see that price action more clearly, let’s look at a daily chart focusing on the last six months…
XLE Daily Price Chart
Source: eSignal
In late July, XLE had just traded down to $46.30, before rallying up to around $50. It was bouncing strongly at the time.
I was looking to see if XLE might trade back up to the blue line and test resistance again.
If it did, and failed, that would prove an even stronger resistance point. Meaning… a higher likelihood that the price would fall, and a short XLE trade would have been successful.
But it didn’t bounce that high, and instead it’s now facing a shorter-term resistance point – the red line on the chart.
However, I still see potential for XLE…
For three weeks, XLE has traded in a tight $2 range. A look back at the XLE price chart tells you that this type of price action is rare.
Put simply, XLE doesn’t sit idle for long. A break out in either direction could soon be about to play out.
So, here’s how I see it…
If XLE can break above the red line, that could provide a nice profitable long trade, as it could move very quickly back to test the resistance level (blue line).
However, if XLE breaks lower from here, then it could fall much further. Another 15% fall could be for the taking, just like in June and July.
Either way, this is one of those situations where we can see the clear potential to profit from a move in either direction. That gives us double the opportunity to find a profitable trade – in just one stock.
And, this is one to watch.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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