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Energy Sector - How it Works

Oil.jpg

Russia, USA and Saudi Arabia, ... these are just some of the world's biggest contributors to the Energy sector, and when we understand that Energy is made up of Oil, Electrical, and Gas reserves / exploration and refining it's not too difficult to see why these nations have such a big say in the performance of this highly volatile sector.

The overall volatility of the sector is largely attributed to the rise and fall of natural energy prices - (if we could use the example of Oil for a second) - generally speaking if Oil prices rise, the sector will rise, the aligned stocks will also rise (the Oil companies) and by taking BUY positions when Energy is advancing you're really in a good place to benefit from the rising sector.

For those that follow me closely, you'll all know that a few months ago, I was Bullish on Energy and I made an incredible trade on Brent Oil, and rather than ramble on and give you a heap of Trading jargon that many of you won't understand I'll simply show you my thinking and rationale - hopefully you'll learn something.

If we compare the Energy Sector (XLE) and correlate it with the individual components within this sector, you can quite often locate high probability environments for taking entry.

In the example of my trade, if you could have a look on the chart for the Break Out circle which was on the 11th April 2018 - we can clearly see a price break out above a previous area of resistance (the red line)- which is known as a Break Out entry.... but if we can double this information up and look for further confirmation in order to green light the trade and if we can find it, it really adds further weighting to taking a position.

Why Brent Oil?

Brent Oil Historic.jpg

After observing the above Chart, it's probably clear why a position would be taken, but when we also looking at the Energy Sector (XLE), we can see that something similar was happening on the same date.... the XLE was ALSO breaking out, really giving us double confirmation that price was likely to advance and it's why I was so active on Social Media and why I was hinting to everyone that Oil was the place to be during a volatile stock market, in which I was largely standing aside.

What was Energy doing?

Energy Sector Historic.jpg

I'm hoping the above clearly demonstrates why I personally taken the trade, and rather than keep posting charts, I will simply say that this also coincided with individual energy stock companies advancing in price also... so when we have break outs within these sectors, it really does pay to understand where the strength is within the sector.

Hypothetically if we had seen strength within Energy, and it was Gas or Electric that was breaking out... then I would have been looking at Electrical or Gas companies for taking a position - so I hope this makes sense.

The Energy Sector is also extremely susceptible to political events that affect supply / demand and this is why a lot of traders stay away from this area of the stock market.

If there are missiles going off in Saudi Arabia... Energy prices are affected.

If OPEC turn on the tap creating more supply - Energy prices are affected.

If Trump opens his mouth and says oil is too expensive - Energy prices are affected.

The above examples are merely just a few, and the sector certainly has MANY more influences, but by taking a position in the market, it's not really a case of just letting the trade run... you NEED to manage the trade on a daily basis and be aware of when there are likely to be events that can trigger a potential drop in Oil prices.

Most traders also think that Energy only affects Oil & Gas, and whilst  this is certainly the most popular area for traders, but we must also consider the emergence of Alternative / Renewable energy, those of you that wish to take a position in Energy can also look to these areas which may offer good potential for investment as the technology within the Sector becomes more streamlined.

In summary, Energy is made up of many areas of the stock market and is known as a highly volatile area.... it's not for everyone... I personally take the view that if a trend is developing, I simply do not discriminate and I am happy to take a position.

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Sam McCallumComment