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Oil stocks are getting ready to break out.
Back on May 24, I shared a developing triangle pattern in the Energy Select Sector ETF (XLE).
Although the potential of the pattern was very exciting, there was a word of caution for readers.
You see, one of the key characteristics of a triangle is sideways price action. This means that traders must be patient when it comes to trading this setup.
Getting in too early will likely lead to frustration. Either due to the time decay that will chew up the value of your options, or because the market just isn’t going anywhere.
And indeed, between May 24 and July 10, XLE went absolutely nowhere. But now, things are looking more exciting.
Here’s a version of the chart that was shared on May 24.
Notice how on this chart, the triangle hadn’t broken out yet. XLE’s price action was neatly contained within the two blue trendlines.
Now, we’re going to look at an updated chart of XLE.
The trigger to trade a triangle is to wait for a breakout. And as you can see, XLE has now broken out of the resistance line of this particular setup.
Triangles are one of my go-to chart patterns when it comes to identifying trades with incredible potential.
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That’s because once a triangle breaks out, it usually results in a swift and sudden move. They also make it quite clear where to place your stop loss in the event the trade doesn’t go according to plan.
This combination means that triangles almost always offer a great risk-to-reward potential.
In other words, if you’re risking $1 on a triangle setup, you’ll typically have the chance to make at least $2 or $3.
In the case of this triangle in XLE, the breakout occurred at a price of around $82. A reasonable stop loss would be just below $78. This means just $4 of risk on this trade.
On the other hand, a return to the prior highs from November 2022 would mean a move up to about $94.
That gives us an excellent $12 of upside potential while only risking $4. In other words, that’s a trade with a 1:3 risk-to-reward ratio.
One of the keys to my trading strategy is to consistently look for trades where the potential returns greatly exceed the risk. XLE definitely meets this criteria right now.
Let’s keep an eye on this ETF to see how it performs over the next several trading sessions.
When the next meaningful move happens, I’ll be sure to update you right here.
Happy trading,
Imre Gams
READER MAILBAG
Have you traded the triangle pattern before?
Let us know your thoughts – and any questions you have – at [email protected].