10-year
Exxon chart
By
looking at the 10-year chart of this company we
get an idea of it's past performance and overall
trend. We can see that generally this stock has
been in an uptrend for most of it's 10 year history.
There is a short downtrend in the last third of
the chart followed by a strong uptrend.
In
this case, a buy and hold trader would have done
quite well. Trading with the trend would have
increased the profit significantly. For the first
six years of the chart, we see a strong uptrend,
then a two-year downtrend followed by a two-year
uptrend. By trading with the trend we would have
only been in the market for eight of the six years
and reduced our exposure as well as increased
our profitability.
When
looking at our trading strategy, this long-term
view should apply to all types of traders. Ultimately,
a trader who is buying should be interested in
purchasing stocks that are trending up. Even though
the most recent movement indicates a strong uptrend,
several market factors have influenced this price
movement, specifically, the cost of oil. It would
be expected that when the price of oil drops so
will the revenue of this company. As long as this
trend stays on track this chart still has potential
for profit. If the trend breaks then we will exit
our position.
5-Year
Exxon chart
The
5-year chart gives us some insight into the secondary
trend correction that was seen in the earlier
chart. At the top of the last trend we can see
a clear double top and 1 1/2 year down trend. The stock forms a period
of consolidation and then breaks out into an uptrend.
In the consolidation period a series of higher
lows and lower highs can be seen and is similar
to a triangle formation. A triangle formation indicates
that when the two trends cross a breakout will
occur (in either direction).
2-Year
Exxon chart
For
the last two years the stock has maintained a
steady uptrend. In this time frame we can see
some small secondary trend corrections, but nothing
significant. The price keeps forming new highs.
6
mo Exxon chart
Looking
at the short term, we can see that the stock is
uptrending. It has recently had a short period
of consolidation, followed by another upward breakout.
Trading in this time frame would be considered
the domain of the swing trader.
As
stated in Dow Theory, there are secondary trends
contained within the primary trend. In this chart
we can see that the long-term trend (major trend)
is up, there is a correction/secondary trend (the
short term down movement), and then the trend
is continued. We can also see a period of consolidation
when a new 5-year high is formed. This period
of consolidation could be caused by profit taking
and uncertainty of price value. The price then
moves sideways before forming a new high indicating
that the major trend is still intact. Until the
new high is formed it would be wise to assume
that this could be a trend reversal. As seen in
the 5-year chart and the first high, a double
top is formed before the major trend is broken
downward. According to the 2-year chart, this
stock is in a clear uptrend and at this time period
(or greater) small corrections are easier to ignore.
Note:
- Always
trade with the trend.
- It
is always worthwhile to look at the long-term
trend so as to not accidentally enter in a small
secondary trend/small correction/consolidation.
The goal is to trade with the trend (preferably
the major trend)
- Stick
to your rules.
Next: Quick
guide to analyzing an opportunity
