Wednesday, January 10, 2007


I’m going to work on my new favorite subject – breakouts and I’ll use the energy space as an example since that is one that we will be following over the next couple of weeks.

Here I have annotated the 6-month weekly chart of XLE to show you what a breakout might look like - both the last one and perhaps the next one. The fact that the under-line neatly transects those three lows is purely coincidental – at least for the moment. Point A is where the last breakout came. The obvious question is - why isn’t the over-line between 8/21 and 9/18 instead of where it is? Well the obvious answer is – it was and the breakout (by my definition) didn’t occur at that time so the line keeps getting moved until a breakout (by my definition) occurs. And that line between 8/21 and 9/18 would have bisected that tall white candle on 9/25. Now you could say that that was a “breakout indicator” and then simply have waited for the confirmation which came at 10/09 – the site of the current breakout. You always need a confirmation. Or you can bump the line forward week by week until you get a body above the line. Trust me folks – this isn’t rocket science it’s more like - art class on a 1st grade level. Remember? – connect the dots? – see the monkey? I know - I know you thought it was magic didn’t you?

Here’s another chart – this one is ACI one of the major miners (I just had to, I’m sorry). Note how this chart seems to replicate the action in XLE – there is probably a good reason for that and maybe it’s because it too is part of XLE. What I like about ACI is that it is a volatile stock that moves almost point for point with XLE but costs about 20 dollars less per share. The ramifications of that are pretty obvious - for every share of XLE you buy you can buy one and half shares of ACI. Note the breakout is almost exactly the same as with XLE. I’m following ACI too.

And for a final chart in the breakout series I’m staying with the energy patch but this time I’m showing PXE - another ETF related to energy - this one for exploration. Notice that it too follows along with XLE. With the price of this one being so low I can buy three shares for the price of one XLE. The problem is I only get an equivalent or maybe even a bit lower return so there is no real advantage to one over the other.

If energy takes off I will probably be in a stock such as ACI because I believe that it gives me the best return for my buck. If you want diversification then XLE is probably the place to be and if you are strapped for investment cash but want a piece of the sector then PXE might be your choice.

But do your own DD and remember – nobody knows nothing – including me

Charts courtesy of - a good company (I get nothing for the endorsement - I do it because I believe it).

1 comment:


Excellent post on breakouts.