The post-FOMC announcement stock melt-up was a godsend for beaten down energy stocks. The oversold sector was just begging for a bounce and finally found a much needed catalyst.
The Energy Select Sector SPDR (ETF) (XLE) has now climbed 9% from its recent lows on above average volume. Interestingly, the rebound in energy stocks hasn’t been matched by any type of sustainable recovery in crude oil. Poor ol’ black gold tumbled back to its lows yesterday and remains a dog.
While the Yellen-induced rally in XLE was successful in creating a short-term bottom for the sector, I’m skeptical that we’ve seen the end of the pain in the energy space. Crude oil continues to act pathetic and until it rights the ship I suspect the relative weakness in energy stocks persists.
On top of that the chart of XLE is a far cry from healthy. The price remains in a downtrend with declining moving averages aplenty. And there are a number of overhead resistance levels just sittin’ up there waiting to smack down any further rally attempts.
I do think the energy sector could rise a bit further, but the odds of getting into the low 80’s and staying there is low.
Game energy stocks with options
Traders looking to profit from an inability of XLE to maintain its recent gains could enter January bear call spreads. Consider selling the Jan 84-87 call spread for 38 cents or better. The max reward is limited to the initial 38-cent credit received. The max risk is limited to the spread between strike prices minus the initial credit, or $2.62.
In timing the entry, I suggest waiting for signs the rally in the energy sector is rolling over. It may take another day or two.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
