I wanted to talk a bit more about my bearishness on energy.
Below is a chart of USO, the crude oil ETF. The horizontal line at the top and the sloped trendline at the bottom define the right triangle pattern. On January 15th, prices broke out, yet this breakout lasted literally hours. Afterward, it broke back below, yielding a failed bullish breakout, and it skidded for months. Importantly, it completely collapsed below the pattern in early April, and it has been below the trendline ever since.
Putting it another way, the pattern which used to constitute the bullish base for oil now represents strong resistance, as prices have been hurled outside the entire pattern. So long as USO stays under that red diagonal, this is bearishly configured.
I don’t trade crude oil itself, but I am quite interested in oil-producing stocks. I am presently short CNQ, FANG, HAL, TECK, XLO, and XOP.
That last one, the oil/gas producers ETF, is shown below. It has a remarkably well-formed head and shoulders top, and try though it might, it doesn’t seem to have enough power to make its way even back to its own neckline. Thus, my stop-loss is at 115.10.
Unrelated to any of this at all, allow me to share a bit of a portfolio management lesson. It’s kind of Level 101 stuff, but I screwed up and hope others might profit from my mistake.
To come right to the point, it’s important to spread your bets rather evenly, especially with individual stocks. I don’t mind having an outsized proportion of my portfolio dedicated to some large, heavily-traded ETF (like IWM, for instance).
My mistake, however, was having an overly-large short on HON, a single stock. I got stopped out immediately this morning on the heels of their strong earnings report. My error wasn’t being in the stock in the first place – – there’s nothing wrong at all with that. My mistake was having a position that was at least twice as big as it should have been, thus yielding a loss twice as big as it should have been.
Had the stock plunged, of course, I probably wouldn’t be waxing poetic about this little life lesson, but the point still stands: keep your exposure on individual stocks at a modest level.
