Stock market history was written yesterday. The oldest surviving division, Exxon Mobil (NYSE :), has been kicked off the mega-cap index to pasture as the old-fashioned industrial economy withers and a new technology-driven era flourishes.
Earlier this week, the ways the tech sector is taking over the market. It has been performing better on every time frame for the past five years. We argued that the worst global pandemic in 100 years has only accelerated the world's dependence on technology – and the future is here and now.
Exxon has been part of Dow in some form since 1928, but stock weakness, along with the wider energy sector, represents the downside of the technology takeover. Energy now makes up a meager 2.5% of the Index, down from 6.84% five years ago and from 10.89% a decade ago. At the same time, technology rose from 18.48% of the benchmark in 2010 to 28.17% today.
Shares of Exxon plummeted yesterday, down 3% following news of the removal. A study of the forces of supply and demand suggests that the price will soon fall much more sharply.
The stock traded in an H&S summit, one in which demand was too sparse to properly shape the right shoulder as prices plunged through the July 9 neckline and tried to claw above it in July and August, but in vain. That trading pattern itself may have created a secondary, smaller H&S top. Yesterday's sale is testing that secondary neckline.
The 200 DMA represents the long-term downtrend and has suppressed the June 8 high and shaped the head. The 50 and 100 DMA had a tug of war within the right shoulder formation. It was touch-and-go whether there was enough demand left to push prices higher than the neckline.
Note how the volume dried out with the rise towards the head, and then peaked briefly, like a candle glowing more strongly before sputtering out. The same volume pattern, albeit not quite so sharply, repeated itself with an attempt to push prices back up, but unfortunately the participation was on the downside, which tells the whole story.
Note how the MACD, ROC and RSI all project lower outlook based on price average and momentum comparisons. It's rare to see everything aligned and pointing in the same direction.
On the other hand, that uniformity may draw the attention of contrarian traders, who might interpret this apparent consensus as an indication that selling and shorting could be spiking, indicating the risk of an opposite trade. However, that requires impeccable discipline and money management skills.
Trading Strategies
Conservative traders would wait until the smaller potential H&S is complete as the neckline can provide support. for a jump.
Moderate traders could also short the potential recovery, counting on resistance from the July and August highs, as well as the broken trendline forming the neckline.
Aggressive traders can take an opposite long position and enter the potential "right shoulder making rally" before going short with the rest of the market. However, aggressive trading just means you have to be more, not less, careful than prudent traders. It requires more discipline and additional trade preparation. If you don't understand this post and the risks involved in the trade and how to manage them, DO NOT trade.
Trade Sample – Short Term, Aggressive, Contrary Long Position
Admission: $ 40.75 – with a dive
Stop-Loss: $ 40.50 – Below Friday's lowest
Risk: $ 0.25
Target: $ 44.50 – Below Psychological Lap Number, July-August Highlights, and Intermittent Uptrend Line
Reward: $ 3.75
Risk: Reward Ratio: 1:15
Author's Note: This is just an example to demonstrate the essential parameters of a coherent trading plan. You can adjust the inputs, such as entry, stop-loss and target, to your budget, timing and risk aversion. Remember, winning or losing this trade does not turn you into a successful trader, or indicate that you are not. That requires long-term statistical consistency, requiring many transactions, making budgeting crucial.