By MoneyMorning.com.au
Yesterday Kris wrote about shale gas.
Which got us thinking about the energy sector…
Which led us to this interesting chart…
Which makes the energy stocks in the ASX Energy Index look cheap!
The Australian Stock Exchange’s Energy Index (XEJ) is trading at 13,764.50… That’s 44% below its all-time high… It’s 27% below its most recent high in April 2011… And right below an important support level.
If the index can break out above this red line, the index could trend up… Where it would find its next support at around 15,000, followed by 16,000… roughly a 14% gain.
But as you can see in the circle to the right of the screen, in October and December 2011 the index had two false breaks through this level. And the index quickly fell back below this line.
On the long-term chart, the next support to the downside comes at 12,000… Followed by 10,700… If the index hit that level and you invested in a fund that tracks it, you’d be looking at a 28% loss. That’s a risk-reward ratio of 2-1 – those odds are against you.
Most novice traders place their trades as soon as a stock breaks out of a trading range. Slipstream Trader, Murray Dawes says that’s a big mistake. Because many break outs tend to be a ‘false break’, where the stock is unable to hold above a previous high.
Murray prefers to see the stock (or index) settle into what he calls a ‘distribution’ and then trade the stock within that range.
For the moment the higher probability bet is to hold off and wait until the index makes a sustained break either way. Only then should you think about placing a bet.
Aaron Tyrrell
Editor, Money Morning
From the Archives…
Why Fallen Commodity Prices Mean This Sector is Worth a Punt
2012-01-13 – Kris Sayce
Why Australian Banks Are a “Suckers” Investment You Should Avoid
2012-01-12 – Greg Canavan
The Fed’s Funny Money Merry Go Round
2012-01-11 – Kris Sayce
Silver Price Ready to Explode
2012-01-10 – Dr. Alex Cowie
Will the Gold Bull Keep Running in 2012?
2012-01-09 – Dr. Alex Cowie