Triple Timeframing the Breakout Rally in XOM

Jan 24, 2011: 1:32 PM CST

Exxon-Mobile (XOM) has been one of the strongest performers in the Dow Jones index lately, and the rise correlates in part to the QE2 stimulus effects, giving us a great lesson in both charting breakouts and “stock-specific” narratives, or even broader market narratives.

Let’s start with the monthly chart and then drill down to the big 35% rally as seen on the daily chart:

A brief refresher in “QE2 Stimulus Effects” – a rumor/whisper campaign began in late August/early September 2010 regarding the next stimulus package from the Federal Reserve – which would later be dubbed “QE2” that revolved around the Federal Reserve purchasing US Treasury Notes in an attempt to push yields down and thus stimulate the economy.

Many articles have been written about that concept but the purpose of this article is to view the ‘ripple effects’ on the chart of Exxon-Mobil, a stock doubly-suited to benefit from the QE2 Policies.

Namely, the US Dollar weakened due to the stimulus, which in turn boosted prices of assets priced in dollars – for example, oil and stocks.

Perhaps not surprisingly, oil stocks stood to benefit greatly from the stimulus measures (still ongoing) as the currency weakened and stimulus/liquidity was added to a recovering economy – oil tends to move in the same direction as stocks as both are tied in large part to the health of the US and Global economies.

Let’s now turn the attention to the chart of Exxon-Mobil (XOM) weekly, which broke a MAJOR falling trendline and confluence monthly EMAs at the $65 level at the end of October/early November.

For shorter term traders, it’s important to keep monthly levels and price structure (trendlines, swing highs/lows) in focus to see if these long-term levels break or hold – which gives opportunity via shorter-timeframe positioning (depending on what happens at those levels).

Price broke through $65, which set the next intermediate price target to the December 2009 prior swing high target near the $75 level – which was hit very quickly as the breakout price move continued.

Let’s drop to see that move – and prior lower-frame trendline breaks – on the Weekly Scale:

Ok this chart is over-annotated, so let’s take it step by step to hit the highlights.

FIRST, I’m just showing educational examples of how price broke intermediate trendlines – both up and down – through 2009 and 2010 and the subsequent rally or decline that continued after the breakouts.

Breakouts from trendlines like these offer trading entries, with low-risk stops (above the trendline).

I’m showing these as arrows just for educational purposes in the context of a discussion of a breakout above $65’s resistance.

SECOND, now let’s focus on the main topic at hand:  The QE2-driven price breakout move in XOM.

I mentioned earlier the key $65 level as both trendline and monthly EMA resistance.  Notice also how $65 serves as resistance via the 50 week EMA which price broke – turning the tide from sellers to buyers – or from suppply to demand on such a critical price breakthrough.

I like to call those “game-changers” – when price shatters a critical higher timeframe level.  Anyway – this is a good example of that concept.

What erupts is often a “Positive Feedback Loop” wherein those who are short shares of XOM must then cover, as price rallied above their key level.

Simultaneously, those sidelined buyers waiting for confirmation, or just buyers coming in from fundamental analysis (not looking at charts at all) help drive price higher, which forces more bears to stop-out, which then drives more interest in the breakout, bringing in more buyers.

Main idea here:  The breakout above the $65 level in early November 2010 was a key gamechanger that set-up a potential play for the $75 level (prior swing high) and ignited a Positive Feedback Loop of buying pressure.

Here’s what it looked like on the daily chart, which brings us to where we are now:

Look closely to see how the LOWER frame signaled an initial resistance breakout as October began – price broke the August high at $62 which simultaneously broke above the 200 day SMA – a trigger that investors use as a “Yes/No” decision-support when adding a stock to their portfolio (generally, investors prefer to add stocks that are above the 200 day SMA).

So the daily chart had an “All-Clear” signal in early October, the weekly chart similarly gave a buy on the breakthrough of the 50 week EMA at the $62 level, and then finally all of this lower timeframe bullishness culminated with a breakthrough of the $65 level – the trendline and triple EMA level on the monthly chart.

This is a great example of how to incorporate higher timeframes and objective price levels into your lower timeframe trading and even investing decisions.

It’s also an example of how lower timeframe structure gave early clues ahead of levels breaking on higher structure – timeframes work together in creating the bigger picture of probabilities and opportunities as a price move develops.

I did want to point out one more lesson-item on the daily chart – the early November period shows a surge in Price, Momentum, and Volume, commiserate with the key breakout of the monthly level which likely triggered the Positive Feedback Loop I mentioned earlier – bears buying shares to cover and buyers buying shares.

Generally, when price is in a rising trend and you observe rising/stable momentum and volume, it is a strong confirmation of the trend and suggests odds favor even higher prices yet to come.

Price pulled back with the market in November then broke above a mini-triangle pattern with a strong gap, which leads us on the monthly creep where we are today as we challenge the $75 level that was the original target on the breakthrough of $65.

We’re seeing similar momentum and volume coming into the stock at this level, so do watch closely for signs of price breakthrough or alternatively a pause here.

Take a moment to learn these lessons from this stock – these lessons are not specific to Exxon-Mobil, but are principles of technical analysis that are helpful in guiding trading and investing decisions in all markets and all timeframes.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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4 Comments

4 Responses to “Triple Timeframing the Breakout Rally in XOM”

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  2. Matt Says:

    Corey, did you also notice the back-to-back Bullish Engulfing candlestick patterns on Novemeber 29th and 30th, with each one having more volume than the previous bar. The open gap up confirmed the candlestick pattern. It's amazing how so many different techniques all pointed to higher prices in Exxon.

  3. Corey Rosenbloom, CMT Says:

    Matt, Good comment!

    I didn't mention it above but that's part of the 'weight of the evidence' model TA is good at picking up. True – there was a lot of bullish evidence – from the charts and the QE2 rumblings which later became reality (declining dollar = rising assets priced in dollars… stocks and oil – a two-punch for oil stocks).

  4. Precision Trading Says:

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