Exxon – Probabilistic Nature of Charts

By | February 6, 2015

The daily Exxon Mobil (XOM) chart is thing of beauty. In one pictograph it reveals the probabilistic character of charting and why it is an art form and not a science. The downtrend trend line that formed after the decline off the August highs to the October lows was broken to the upside and retested, forming a large inverse head and shoulders pattern with neckline resistance at the 50 % Fibonacci retracement level of the August/October range. The breakout that followed targeted a strong move but it was quickly thwarted by resistance at the 62% retracement level. The positive takeaway was the potential cup and handle formation it morphed into, with rim line resistance at the 62% level and an even higher target price projection. There was no breakout and the stock price reversed falling back to the October low, which was also the low of the year. Another positive was the potential for a double bottom and there was a bounce rally that retested and failed at the 50 retracement level. This year’s January low started to look like the right shoulder of another inverse head and shoulders pattern, but the 38% retracement level thwarted that advance to the apparent neckline. Since then, the stock has remained under this retracement resistance and dipped down to make a third intermediate term low. Today it is testing the downtrend line drawn off the highs since December and the 38% Fibonacci level. If it breaks to the upside, is a triple bottom in place? Can we expect a strong move to sheer throught the retracement levels? New highs? No, we can’t expect anything, all we can do is react prudently. Use tight stops on countertrend trades, respect tested trend lines, and understand patterns can fail to live up to your expectations, let them prove themselves.
The charts give and they take away, and the true key to successful trading is proper money management. Spend just a small portion of the time you scan charts, working on your money management plan and trading becomes more deterministic and less probabilistic.


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.