Trading Oil & Energy Chart Patterns

April 9, 2018 03:59 PM
Chart Patterns

The energy sector ranked the last in sector performances in 2017. In June 2017, crude oil traded at a low of $42.37 per barrel and many analysts expected lower prices with a target of $40 or lower as energy market sentiment has been bearish. Crude oil turned bullish in August 2017, when it broke a pattern of lower lows and lower highs by failing to take out the June low. 

Since then, crude has made a series of higher highs and higher lowers and recently breached $66. Energy markets are showing strength with the underlying market structure of a lower U.S. dollar, higher global demand and global growth. Many analysts think crude may be fairly valued at $60 per barrel. 

U.S. equity markets and energy stocks experienced a massive sell-off in the first week of February after an extended rally. Oil and gas giants ExxonMobil (XOM) and Chevron Corp. (CVX) both reported fourth-quarter earnings that fell short of analyst expectations, and both saw a more than 10% drop in their stock prices. Despite this, most analysts are bullish on both the overall sector and crude oil prices as both started off 2018 with a bang, and many analysts think energy sectors/stocks will outperform in 2018.

Chart Patterns in Energy Stocks

The energy sector exchange-traded fund (ETF) SPDR Energy (XLE) is forming a cup-and-handle pattern (see “Trading Cup & Handle Patterns,” Modern Trader, March 2017). “Energy in reserve” (below) shows a cup-and-handle pattern in XLE’s daily chart. Since the beginning of 2017, XLE experienced a bearish trend. This bearish trend was reversed in August 2017. The decline and rise formed a perfect cup and handle pattern for the past 13 months. In a broad market sell-off in early February, XLE declined close to 10% due to the earnings from Chevron and Exxon to signal the start of the “handle” part of the cup-and-handle pattern. XLE’s cup-and-handle breakout level is at $78.45. If XLE completes the pattern and closes above the breakout level, its targets are $84.78, $88.75 and $91.

Inverse Head & Shoulders Pattern 

Crude oil futures are in the midst of an inverse head-and-shoulders pattern (see “Patterns Within Patterns,” MT May 2017) from April 2017 to October 2017 as it formed its head at the low of $43 and shoulders at $45 and $46.50 (see “Crude continuation,” below). Inverse head-and-shoulders patterns are traded from the long side when the underlying’s price closes above the neckline. In October 2017, crude closed above neckline ($51.565) creating a long signal with a stop below $48. The set-up’s targets are $56, $59.75 and $62.Crude oil rallied to reach its second target range. Its third target range is $70 to $73.

Symmetric Triangle Pattern in XOM

The symmetric triangle is one of the most important chart patterns in technical analysis. These chart patterns form when the market is in an indecision mode where supply/demand is in a state of equilibrium (see “Trading Symmetrical Triangle Patterns,” MT April 2017). Even though it is hard to predict what direction the underlying market will break out toward since this is a consolidating pattern, traders can take advantage of a breakout in either direction with a relatively tight stop. However, the symmetrical triangle is generally considered to be a continuous pattern, so our initial assumption is a breakout in the direction of a previously established trend. Once the price breaks out of the pattern, it usually results in a large move in the direction of the breakout. Symmetric triangles are also referred to as “coils” or “contracting wedge” patterns.

ExxonMobil’s weekly chart had been trading in a symmetric triangle pattern as it consolidated from the peak of $104.76 in July 2014 to a low of $66.57 in 2015 (see “Long-term set-up,” below). Since then, it made lower highs and higher lows to form a symmetric triangle pattern. The pattern breakout level is $86.37 with a stop below $80. Targets are $97.60, $104-109 and $116.

Cup & Handle Pattern in Chevron 

Cup-and-handle patterns are continuation patterns, and they usually form in bullish trends as noted above. Most cup-and-handle patterns are very reliable and offer great trading opportunities. They also form in all markets and in all timeframes. The cup formation is developed as a consolidation phase during price rallies from the round bottom formation during multiple weeks to months. The handle part forms due to a price correction after the cup formation and before a clear breakout to the upside. 

“Chevron’s cup overflows” (below) shows a cup-and-handle pattern formation (similar to XLE) in Chevron’s daily chart. CVX formed its cup-and-handle pattern from January 2017 to October 2017 from a peak of $119 to a cup low of $102.55. From October 2017 to December 2017, CVX also formed a handle from $112.52 to $119. In January 2018, CVH traded above the breakout level ($119) to signal a long trade setup. Chevron’s stop is placed below the handle low of $112.5. Targets are set at $125, $129 and $139. On Feb. 2, 2018, CVX missed its Q4 earnings expectations and experienced a massive sell-off after reaching its first target range between $129 and $132. 

Energy is a hot sector, tab these patterns and they are sure to repeat in other markets throughout 2018.  

About the Author

Suri Duddella