XLE, It Keeps Pulling Me Back In

There has been much debate of the past two weeks as to whether the market in general has topped. Some make the argument that record levels of bullish sentiment will lead to a down turn, and others that QE2 is creating a bid so keep buying every dip and all this is happening near key technical levels on the indices. It really makes you stop and think about putting capital to work.

But every time I try to get out, one sector, Energy, keeps pulling me back in. I wrote about the strength of Energy Select Sector SPDR, (Ticker: XLE) relative to the market and other sectors in my Sector Review this weekend. In fact of the 17 positions I have open, 11 are in this sector. I hear most of you now whispering about how crazy I am, not just to have money in the market but such a concentrated position. Yet I sleep well at night.

Managing Concentrated Risk in an Uncertain Market

The answer comes from using good risk management techniques. Every market structure presents opportunities. You can’t just sit on your hands and pass them up. Let me illustrate the steps that I take to manage risk as a major move progresses using 4 current positions.

1. Stop Loss
I entered long on Nabors Industries, (Ticker: NBR) today when it broke resistance at 24.50. To protect my capital I used a hard stop loss slightly below 24.16. This level was chosen because it been prior resistance in the past and will now act as support. This stock just broke out today so I give it some downside room but not a lot.

2. Trailing Stop
I also entered Schlumberger long today (Ticker: SLB) when it broke the plateau at 88, retested it and held. As Schlumberger moved higher I changed my hard stop at 87.80 to a trailing stop, using a 75 cent trail (this amount is illustrative). So as SLB moves higher my stop moves as well protecting some gains.

3. Stock Replacement
Last week I bought Halliburton (Ticker: HAL) just below 40. As it moved up to 42.00 last Wednesday I protected some gains by selling the stock and buying the call options, in this case the February 42 strike. This allowed me to take some of my gains and continue to participate in the upside using the rest of the gains. I have since rolled these to higher strikes twice, first selling the 42 strike calls and buying the 44 strike calls, and then today selling the 44 strike calls and buying the 46 strike calls, taking out more gains each time. I have now taken out over $4.25 in gains and am still participating to the upside using the House’s money.

4. Call Spreads
I bought Exxon Mobile (Ticker: XOM) nearly 2 months ago as a play on Oil moving higher. As it moved higher I progressed through the stages above and took gains rolling into February 80 strike call options. The technicals suggest it may pause for a while near 85 so I last week took the final step, turning the calls into call spreads by selling higher 85 strike calls. I still have upside participation to 85, and if it get there quickly I can roll the spread combination higher to be a 85/90 spread pocketing more money along the way.

Using this set of tools and processes I can participate heavily in the upside of this sector while protecting my capital and taking gains along the way. Use these or create you own risk management strategy so that you can sleep at night too.

Previous Posts that Lead to the Trades Above

NBR and SLB

HAL

XOM

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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