09.14.2022
This article asks, "Has XLE formed a symmetrical triangle pattern, aka a coil?"
Key Takeaways
As technical analysis continues its journey towards quantitative work, we must remember and honor its classical roots.
XLE has set up in a classical coil pattern.
Introduction
Considered to be a paradigmatic work of Classical Technical Analysis, Technical Analysis of Stock Trends is one of the most influential texts on our subject ever written. The first edition was published in 1948. It was co-authored by Robert Edwards and John Magee.
A significant portion of this book examines the classical chart patterns we are all taught. These include double bottoms/tops, triangles, pennants, head & shoulders reversals, rounding bottoms, and all of the rest. As modern technical analysis continues moving away from classical pattern recognition towards quantitatively based work, I am still amazed by the beauty and simplicity of these classical patterns which have served technicians for more than a century. Continuously revisiting the foundational works that modern technical analysis is built upon is, I argue, incredibly important and rewarding.
Often times we agonize over a chart. We spend hours doing Wyckoff analysis, Elliot Wave analysis, adding Anchored VWAPS, Fibonacci levels, and considering oscillators. We analyze seasonality, volume, relative strength, and plot slanted trend lines and horizontal levels. In short, we use every tool in our kit to examine a chart.
The Charts
Classical Technical Analysis tells us that markets trend and we are to assume that the trend will continue in the direction from which it came. While the broad equity market is in an intermediate-term downtrend, XLE has shown double-digit returns since it's relative strength line turned up on 11/06/2020. To bring you up to date on the large-cap energy sector, XLE, you can read my previous article by following this link.
Our charts are our workspaces. As we interact with them and mark them up through time, our previous markings can be helpful. These markings however shape our opinions of price. From time to time, I like to remove everything from my marked charts except for price and volume. Tonight I did that on the chart of XLE, and here is the result.
XLE Daily With A Symmetrical Triangle Pattern. Click to enlarge.
Price peaked in June 2022 and remains below that peak. While we know there is overhead price resistance, fiscal & monetary headwinds, seasonal headwinds, a movement away from conventional "dirty" energy, perhaps it is as simple as this... a classical coil pattern. Why not? We have the requisite 2 touch points on each converging trendline marked with green boxes. Volume has dried up nicely, showing that sellers have stopped flooding the market with supply, as price continues moving towards the coil's apex.
While price can resolve higher, lower, or go sideways from here, we are taught to assume trend continuation. What would a break out in XLE look like? First, we would close above the downward sloping orange trendline with an uptick in volume. Edwards and Magee warn that volume is needed to validate upside breakouts, and that we also need a move of at least 3% to validate the breakout. That 3% takes us above the August high but below the open June gap which might serve as resistance.
As I said, there are a lot of headwinds for equity appreciation at this time. With this chart specifically, there is plenty of overhead supply from the 2008 and 2014 highs adding to the risk. Optimistically though, there is also a chance for an aggressive trader to start building a position in XLE to profit from a move higher. While there are no guarantees, a resolution up, down, or sideways will be valuable information.
It is absolutely imperative that traders and investors do their own work and develop their own convictions. This is not trading advice. I will not even say that I recommend making this trade. I am simply pointing out the elegance of this classical chart pattern and adding that this might be an interesting spot for an aggressive trader willing to take on risk in an already very risky market.
Trade Setup
Enter: Set a buy-stop at $84.
Target: $115.50 is a measured move of the coil. +27.5.
There is going to be a lot of supply coming to market as we press
higher, and the majority of breakouts have been failing recently.
Stop: Set a sell-stop at $76.5. This is below the last swing low and under
the lower trend line. -7.5.
Current 10-day ATR: 2.4.
Reward to Risk: 3.66:1. 3.12x ATR10.
Conclusion
XLE has set up in a classical technical chart pattern which presents an opportunity to start building a position for a long trade.
This is a very risky trade. Seasonality is not on our side. The trend of the overall market is not on our side. The chart itself has significant overhead supply, and there are additional risks I am not mentioning.
The idea of this post is simply to remind us about the roots of technical analysis and the elegance of classical chart patterns which I tend to overlook for horizontal price levels.
As always, thank you for reading. This article is for educational and informational purposes only. Trade at your own risk. The author may or may not have a position in the securities mentioned. Read our full disclaimer here. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
Comments