I’ve found a trade set up that pretty much plays into the broader market. If we look at the S&P 500′s chart from Wednesday, we saw a big rally that, more or less, eliminated Tuesday’s sell off. We do remain in somewhat of a tricky spot.
However, if we look at other things, such as transports, we know that those guys had a really strong day Wednesday. I always talk about “outside days” and, sure enough, Wednesday was an outside day that fully engulfed the past four trading days. That’s very important.
So, on the back of this, I always look at different sectors, and the sector that caught my eye more than most was the energy sector via the Energy Select Sector SPDR (NYSEARCA:XLE). The energy sector left us with a big sell off on Tuesday. On Wednesday, traders came in and tried to push the XLE below Tuesday’s intra-day lows but then, at some point, the sellers gave up and it pushed the price higher. And, of course, Wednesday, we saw confirmation and buying.
If we overlay this chart on some moving averages, note that the 50-day moving average served as a support after a hammer candle from Tuesday. And, from a moment point of view, it has also bottomed out in the near term, and we have room to the upside.
So, the stock that I am looking at for a long-side trade is none other than Anadarko Petroleum (NYSE:APC), which is an oil and gas exploration and production company. Not surprisingly, of course, this stock being in the energy sector, it did something very similar to what the XLE did. It came down to its 50-day moving average, left a hammer, then we saw follow-through buying and, again, it has good room to the upside in terms of momentum.
The downside in APC is very clear. We have a stop that is marked at Tuesday’s low of $77.01, which is just about 3.75% lower. So, about $77 would be a good stop for this type of trade.
In terms of the little bit longer-term picture – if we can call it that – on this stock, note that, more or less, we’ve been trading in a very wide, sideways channel since about October 2010. So, the low was right about $57, and the high was about $89. From here, if this really was a significant enough buying opportunity that we got Wednesday with follow-through buying, then we should be able to target at least $85 as a first spot and follow that by about $88.
In terms of near-term uptrend, as well, that remains intact. We do have very simple trendlines we can draw on the chart. I’m not a huge fan of simple trendlines but as long as they hold, that’s good stuff. You have to bend it a little bit more but, more or less, the broader trend remains intact to the upside.
So, APC, based on the oversold momentum, the candlestick combination buy signal we had with a hammer followed by follow-through buying Wednesday and based on the broader market’s participation to the upside as well, it looks like a good risk/reward picture with a stop at $77 and a first target at about $85.