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Energy Stock Technical Analysis

Brian Hicks

Written By Brian Hicks

Posted August 25, 2010

Editor’s Note: Keep this report handy — it contains only a few of many trading techniques that could help make you a very successful trader. Some of this story may sound familiar, as I’ve covered these trading techniques in the pages of Wealth Daily… But today I want to reiterate them to demonstrate how they can also be used with energy stocks.


About a week ago, we touched on using MACD and DMI to spot trend reversals in energy stocks. And while using these two indicators have been successful, no system has 100% success…

As one reader named Harry pointed out (with regards to natural gas article and our use of MACD and DMI):

Great article! I can see how these indicators worked great on the fall of the Dow and the rise of the natural gas charts. Both the MACD and the DMI indicators coincided at the same time. But how would you have played the Dow in early June when the MACD (12,26) crossed the MACD (9) but the DMI+ did not confirm thereby missing a 500 to 700 point DOW bounce. And then in late June the DMI+ just touched the DMI- when the DOW plunged again to 9800. I always can see, after the fact, how these indicators work great until you run across them and they miss a big move.

And that’s true — using MACD and DMI alone would have missed the leg up and leg down on the Dow.

But it’s for that reason that we always have a back-up plan, which we’ll touch on today.

You can buy the whole seat, but you’ll only need the edge…

Let me start by saying this: There was a way to catch both major moves on the Dow.

First, with the 500 to 700 point bounce (from about 9,800 to 10,600), Williams % Range (W%R) dipped to around -100 — again. Every time the lower negative range of W%R was hit, the Dow popped — sometimes for less time than expected, as seen in early January 2010.

This is why having a system (including more than just MACD and DMI) is essential.

As for the plunge to 9,800, we got a doji crossing the upper Bollinger Band. Whenever we get a crossover of the Bollinger Band, lower or upper — with a candlestick and an oversold (or overbought) read on W%R — we got our Buy signal.

Now that I’ve confused you, let me explain…

It’s easier than it sounds

The beauty of this system is that it can be used in any market — even in recessions.

Let’s use Tiffany & Company (NYSE: TIF) as an example.

On June 22, 2009, we said:

Thoughts of an improving economy are quickly fading again, despite bullish reports that a recession is ending thanks to the World Bank, which just cut its 2009 global growth forecast. It believes the world economy will shrink 2.9% and is warning that the global recession has deepened.

More than likely, we’ll have another sideways trading market this week, which is forcing us to return to technical trading set ups, like the one we found at Tiffany’s. Thematic and momentum trading in this market these days is non-existent. In this sideways trending market, you’ll have better luck trading Bollinger Band bounces.

 Here’s that chart of Tiffany’s at the time:

Tiffany chart August 2010

Notice the long-legged doji (more on dojis in just a moment) at the bottom of the late June 2009 sell-off… That was our turnaround signal.

It’s the same candlestick and Bollinger Band set up that’s marked the bottoms in early March and early May.

We believed we could see at least $28 near term if this holds up. We also have an oversold read on W%R. And just as expected, the stock ramped to $28 — handing us quick gains.

Profiting from technical developments has never been easier

My favorite indicators involve the use of Bollinger Bands, W%R, the news, and candlesticks.

Using just these four criteria, we can call for tops and bottoms on indices, as well as individual stocks.

For those of you that aren’t familiar with the terms (doji, Bollinger Band and W%R), here’s a quick tutorial:

  • Dojis can appear at times of market indecision and have called key reversals
  • W%R (Williams % Range) is the ultimate momentum indicator that signals oversold and overbought conditions with great results. 
  • As for Bollinger Bands (plotted at standard deviation levels above and below moving averages), stock prices tend to stay within the upper and lower bands. So, when the prices (in this case with the Dow) move above the upper Bollinger Band, are coupled with a bearish candlestick read (gravestone doji, for example), and an extreme overbought W%R read is present, we expect a reversal at the top.

Okay, but what’s a doji?

The profit stars — more commonly known as dojis — are commanding reversal signals. These are formed when the candlestick opens and closes at the same level, implying indecision in the stock price.

doji starsDepending on the location and length of the shadows, dojis can be categorized into four subcategories:

1. Doji: This candlestick looks like a cross, inverted cross, or plus sign. At the top of a trend, it can indicate that a reversal is near.

2. Long-legged doji: Long-legged doji formations occur when the stock opens at certain levels, trades in a wide trading range intra-day, and closes at the same level that it opened. These become better predictors when preceded by small candlesticks. Long-legged doji formations can imply a change in trend.

3. Dragonfly doji: The bearish version of the dragonfly doji can usually be found at the market top or during an uptrend. This candlestick tells us the bulls may be losing their way and casts doubt on the market’s ability to continue north. Confirmation is essential. You can confirm with a gap down or a lower close on the following day.

4. Gravestone doji: Gravestones can indicate top reversals; these dojis look like gravestones and can signal the death of a stock.

The Bollinger Bands

Bollinger Bands allow users to compare volatility and relative price levels over a period of time, and consist of three bands:

  • A simple moving average (SMA) in the middle
  • An upper band (SMA plus 2 standard deviations)
  • A lower band (SMA minus 2 standard deviations)

Standard deviation — a statistical term that provides a good indication of volatility — ensures that the bands will react to price movements and reflect periods of high and low volatility. Sharp price increases (or decreases) will lead to a widening of the bands.

For our purposes, let’s make this a bit simpler. When we use the Bollinger Bands, the closer the market prices move to the upper Bollinger Band, the more the stock market is considered overbought. The closer the prices move to the lower Bollinger Band, the more the stock market is considered oversold. We’re not going to get into the scientific structures and Bollinger band calculations with each trade.

We’ll be here until New Year’s 2012 doing that.

The Williams Percentage Range (W%R)

The third component of the trade is to find an overvalued W%R read, or a chart where the W%R has peaked. According to the W%R, values of 80% to 100% indicate an oversold condition; values of 0% to 20% are overbought.

(Interesting to note: W%R has the ability to anticipate reversals. The indicator will oftentimes peak and turn down days before the stock peaks and turns down. It does the opposite with upside.)

And now that I’ve confused you even further, let’s look at another example

Take a look at this chart of Exxon Mobil (XOM), where everything lined up perfectly:

Exxon Mobil chart August 2010 

First, notice MACD and DMI. When they agreed with crossovers, we saw major moves on the underlying stock (most of the time). Second, notice that when MACD and DMI agreed, we also got an overbought read on W%R, which also confirmed big moves (most of the time).

Unfortunately, MACD and DMI agreement alone missed the move from $59 to $64. 

But notice that every time the lower Bollinger Band was hit, the stock bounced with an oversold read on W%R. Sometimes, though, as seen in the early May 2010 move below the lower Bollinger Band, the bounce back is less than expected.

We got a candlestick above the upper Bollinger Band in mid-June 2010, with an overbought read on W%R. That would have triggered a buy, which resulted in an impressive sell off from $64 to $56. At $56, we got another turnaround signal with a series of candlesticks crossing the lower Bollinger Band coupled with an oversold read on W%R. That called the move from $56 to $61. 

The bottom line

While using MACD and DMI alone won’t always call tops and bottoms when in agreement, having a back-up system like this one is a must.

It may sound confusing, but it’s really not. As with most things, using these indicators just takes practice.

Let’s look at one more example with Brigham Exploration (BEXP), a personal Bakken region favorite:

Brigham Exploration chart August 2010

Most of the time here, when MACD and DMI agreed, we got a big move; and most of the time, when W%R peaked or hit bottom, we got a nice move as well.

But take a look at the Bollinger Bands and candlestick crossovers… Every time the candles touched or moved outside the lower and upper Bollinger Bands, we got respectable moves.

What’s nice about this system is that even if one part fails, another one can be strengthened.

Because, let’s face it, no two stocks are the same.

I hope I’ve helped with these explanations. If you have any questions, please leave them below. I’ll be happy to get back to you with an answer. 

As with all systems, this too can always be updated to be better. Thus said, while we want to educate you on these indicators, we also want your feedback… Are you seeing something that we’re missing? We want to make the system better. Feel free to leave your comments below.

Here’s to your continued trading success. 

Stay Ahead of the Curve,

Ian L. Cooper
Energy and Capital

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