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Where to find an opportunity to follow the trend: Case Study on XLE components.

November 12, 2017

There is no question that the markets have been on a tear since the U.S. presidential election one year ago.  There are many debates regarding to whom to give credit.  Trump, not Trump.  Maybe its Robert Mugabe or John Cleese – its all semantics to me.  I don’t sit on either side of the U.S. political fence; I voted in the French presidential election in May.  All I care about is global stability and the physical or financial safety of my family.  Since I am an options trader, a little volatility in the market helps as well.

 

The last time the S&P touched its 200 day simple moving average is Friday, November 4th, 2016.  Additionally, every time it has retraced to its 50 day simple moving average, it has bounced.  This has happened four or five times and WILL happen again.  But I’m not willing to bet on when…  As they say in trading: “the trend is your friend.”

 

 

So where do we find trade opportunities that will follow the continued push upward?

 

At the end of the week, I like to do various macro scans on the market.  One of those scans is a simple visual look at each of the Sector SPDR’s, starting with a quick scan various time frames in the Sector Tracker at www.sectorspdr.com.  Since we are discussing the market since early November, here is a comparative performance for the past year.

 

The first thing that pops out at me is that only one of the Sector Indexes, Energy (XLE) is red.  All others are very green.  The contrarian in me wants to immediately look under the hood at XLE to see if there are any opportunities for it or its components to catch up to the rest of the market.  Here is the daily chart for the past year:

 

 

 

Wow! 

 

There is an imminent a “Golden Cross” with the 50 simple Moving Average ready to cross above the 200 simple Moving Average.  Most market technicians see this as a major signal for a longer term bullish move.  Now I want to see if there are any candidates among the components for a bullish trade...

 

TomsOptionTools allows me to do a variety of scans.  One of my favorites is a simple scan to filter a list for recent highs. 

 

 

Scanning the XLE components yields the following, with the top two candidates being COG and VLO:

 

 

Both are candidates for a potential momentum move if and when there is a break of the recent high and may be an opportunity for an option trade.  I like VLO, but am not going to recommend a specific trade as I am not a licensed financial advisor.

 

 

 

If I do make a momentum trade on VLO, stay tuned for Part II of this blog…

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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