Trading Exxon-Mobil (XOM) After Breaking Support

01/29/2010 12:01 am EST

Focus: STOCKS

Corey Rosenbloom

Founder and President, Afraid to Trade

Note: Corey will be speaking at The Traders Expo in New York next month. Register to attend his session free here.

With Exxon-Mobil (XOM) breaking down through critical support at the $67.50 level, let’s take an updated look at Exxon-Mobil and note a key target and potential bear flag development in this stock.

Reference also the January 5 article, “Exxon-Mobil At Critical Support,” for an earlier update.

First, let’s start with the weekly view of Exxon-Mobil:


Click to Enlarge

The weekly chart highlights the lengthy lower trend line that began from the October 2008 lows and is now broken.
The price breakdown of a lengthy, confirmed trend line can be a major turning point in a market, and if that holds true, then we could see Exxon-Mobil slide to test all prior support lows back to the $60 level and even beyond.

Price rests precariously on the lower Bollinger band ($64.52), and that indicates an oversold position, but if this develops into a trend move down, no support level will be safe.

Continue to monitor XOM on the weekly frame for additional clues.

Next, let’s take a look over the last year of trading activity and note the trend line and flag formation:


Click to Enlarge

I wanted to highlight the lengthy rising trend line, and how the sharp selloff began once this obvious level was broken (drawing in new short sellers and causing buyers to stop out under critical support).

Volume is rising relatively as price is selling off, so keep an eye on volume. Rising volume during a selloff is often a bearish continuation sign.

Otherwise, I’m showing a potential bear flag price pattern as labeled, with the final price projection low to target $61.50, which also happens to be an expected critical support zone from the March 2009 lows.

Continue monitoring the price to see if sellers can drive the stock price down to this level. It would be likely if the broader market continues selling off as it is.

NEXT: Closer Look at the Recent Selloff

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Finally, let’s zoom in to see the recent selloff, which was forecast in the event the critical support line broke:


Click to Enlarge

I wanted to use this chart mainly to illustrate the principle of why it is important to monitor “obvious,” or key support levels (such as trend lines) and keep an open mind.

Price can bounce off a trend line (as it tried to do in mid-January), but once the trend line is officially broken (often with a powerful close under the level), then a process of positive feedback kicks in, which sends price sharply lower.

Positive feedback (loop) is defined in charting as sellers shorting while buyers are stopping out (selling), or in essence, both bulls and bears are doing the same thing at the same time (it also occurs during sharp rallies above resistance).

We can learn two lessons from the breaking of a critical support level:

  1. Take your stop loss quickly if you are caught on the wrong side of the break. Do not double down or try to give the market room. Price can sell off violently when caught in positive feedback.
  2. Be prepared to enter short quickly on a break of key support. For the same reason, you can take advantage of a likely feedback loop as an intraday or swing trader by entering aggressively on a suspected break. 

Let’s keep monitoring Exxon-Mobil to see how this plays out now that support is broken and lower targets are possible.

By Corey Rosenbloom of AfraidtoTrade.com

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