While stock swoons are always a little unsettling, last week’s downturn does have a silver lining. A number of stocks that were overbought are now boasting low-risk, dip-buying opportunities. The Energy Select Sector SPDR (ETF) (XLE) and energy stocks in particular look intriguing here.
Remember, XLE is a fund consisting of heavy hitters in the energy space, such as Exxon Mobil (XOM), Chevron (CVX), and Schlumberger (SLB). Its behavior, then, is a function of the strength or weakness exhibited by its holdings. With oil prices suffering an eight-day losing streak, energy stocks and XLE have unsurprisingly dropped in kind.
Despite the fresh round of selling in energy, oil prices have been attempting to carve out a bottom in recent months. The uptick in bullish activity has aided XLE stock in its turnaround efforts. The bullish action in XLE was sufficient in reversing the short-term and intermediate-term trends higher.
Earlier last week, the 20-day and 50-day moving averages were both traveling higher in XLE. The price drop has ushered XLE stock to a pivotal price level. It’s make-or-break it time for buyers, creating an interesting entry point for would-be buyers of energy stocks.
XLE Stock Chart
If you think the bulls will successfully defend the $65 support level, now’s the time to pull the trigger on a bullish XLE trade. Since the recent drop has lifted implied volatility to the upper half of its one-year range, option premiums are fat for the slaughter. Sell the Dec $60/$55 put spread for 60 cents or better.
The spread is positioned to profit provided XLE stock remains above $60 for the next month. The max reward is limited to the initial 60 cents. The max risk is limited to the distance between strikes minus the net credit, or $4.40, and will be forfeited if XLE falls below $55 by expiration.
As of this writing, Tyler Craig owned bull put spreads on XLE.
