Securities Research Services

Monday, January 07, 2008

Energy Reverses It's Fortunes

We have a very important rule we follow when trading breakout stocks. We never buy a breakout that occurs on one day of heavy volume. We need to see a pattern of heavy volume accumulation that indicates institutional interest before we touch a breakout stock. Following this rule helps avoid failed breakouts.

On Friday we traded two breakout stocks, FWLT and EOG. Both stocks broke out from a strong base of volume.

Yet, they failed. Not only failed, they failed miserably.

So, why did our volume rule fail to protect us this round? These breakouts failed because the market rules changed on Friday. 70% of the market has been arguably in bear market territory for several months now. On Friday, the jobs report was used as an excuse to take the remaining market leaders to the woodshed for a spanking.

The rule of the day was sell everything, and sell they did. This resulted in moving the QQQQ into a primary downtrend and led to a mass failure in the energy sector trend that had been running hard on strong oil prices.

It was a tough day followed by a couple of tough months. The failure in the energy trend, however, gives us a high probability shorting set up. Failed breakouts tend to lead to steep declines and some of the high flying energy stocks have a good ways to fall before they run into support once again.

The market spoke loud and clear Friday.

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