XLE: Energy Stocks Are Bouncing Off the Bottom

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The energy sector of the S&P 500, as represented by the Energy Select Sector SPDR ETF (XLE), was once again the worst performing sector on Thursday after already lagging badly for over one month. After the intraday bounce off the lows, however, the sector may finally have reached oversold levels that now could offer active traders and investors an opportunity to play a mean-reversion bounce — it’s time to buy the XLE.

Since late August the XLE has fallen about 10%, or more than twice as much as any other sector in the S&P 500. While the broader market rose to higher highs in mid- to late September, the energy sector had already well established lower highs earlier in the month, measured against its June all-time top.

Of course, there is often more to a story than what we can gather on the surface. Note that the June top in the XLE coincided with a higher low in the Powershares Dollar Index ETF (UUP). The dollar index then staged a massive rally that hasn’t showed any sign of a pause … until this week. In other words, for the past three months the dollar index and the energy sector had an almost perfectly inverse correlation. As a result, when I began to spot signs of exhaustion in the dollar index late last week and early this week, it was only logical to begin closely monitoring the energy stocks for a potential near-term bottom. On the below chart the XLE is in blue while the UUP is in red.

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Looking at the multiyear weekly chart of the energy sector XLE, note that when the sector in April broke past its 2008 highs, it quickly accelerated higher for a two-month spring. But that breakout has been fully retraced thanks to the selloff of recent months.

On one hand, the breakout can be labeled a fake-out move — on the other hand, through a multi-month lens, it is healthy to see a retest of the breakout area, which in many ways resets the chart by working off the overbought readings so that the sector can again resume its multiyear uptrend.

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On the daily chart note that the XLE over the past couple of months has worked its way lower in a systematic way. After breaking below the blue 100-day moving average in early September, the next logical target became the red 200-day moving average. Last week the XLE also broke below the 200-day, and after Wednesday’s selloff it was high time to start looking out for any signs of a bullish reversal. On Thursday the XLE again dove lower but bounced off the lows (along with the broader market), leaving behind a bullish reversal candle.

Active investors and traders can trade an oversold bounce back toward the the 200-day moving average roughly around the $92 area, using Thursday’s lows as a stop on a daily closing basis.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/xle-energy-stocks/.

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