Energy Select Sector SPDR (ETF) (XLE) – What Do Energy Stocks Have Left?

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Ask any random person that even remotely follows the stock market and they will tell you of the pain in energy stocks. But most of those folks would not believe that after the sharp drop early this year, the energy sector — as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) — is actually higher by nearly 3% on the year.

Beat the BellThe downtrend from the summer 2014 highs remains intact for energy stocks, but the more any asset gets oversold, the sharper it tends to bounce. With that in mind, let me paint some perspective on where energy stocks and XLE are, and what the path of least resistance might be.

A good part of XLE’s recent rally can naturally be linked to the lift in oil price, which jumped nearly 50% from the February lows into last week’s highs. Some of the sharpest asset rallies occur in bear markets or a the end of a prolonged downtrend.

While it is difficult to determine just yet as to whether the price of oil in February actually bottomed for the intermediate-term trend, there is an increasingly good chance that it was the beginning of a bottoming phase, which thus would also translate into a marginally more constructive intermediate-term outlook for energy stocks.

XLE Charts

One of my favorite exercises to gain good perspective in a stock, index or sector is to look at ratio charts. In this case, I drew a ratio chart comparing the XLE ETF versus the S&P 500. On this chart, we see that the recent rally in the XLE has pushed its relative strength versus the broader stock market past the 2014 downtrend line as well as past the 2015 downtrend.

Although overbought from a momentum perspective, there looks to be some more marginal upside potential ahead before horizontal resistance comes into play, as marked by the horizontal red dotted line.

XLE vs SPY
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On the multiyear weekly chart, we see that the XLE is now coming into diagonal resistance from the 2014 highs, which at current juncture also matches up with horizontal resistance as marked by the black line, which formerly acted as support. Also, while the February lows in the XLE did come on a marginally higher low in momentum oscillators, this divergence may not have been strong enough to really have marked a capitulatory bottom just yet.

XLE weekly chart
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Finally, on the daily chart, we see that the XLE recently overcame important horizontal resistance in the high $50s and now has a next logical area of resistance closer to its red 200-day moving average, which would also match up with a next line of horizontal resistance closer to the mid- to high $60s.

Two things to note here:

  • The XLE since 2014 has had several 10% to 20% counter-trend or bear market rallies, the steepest one being the current one thus far
  • The lower highs in May 2015 and November 2015 both took place after a mean-reversion move back “toward” the 200-day moving average.

XLE daily chart
Click to Enlarge

So, from this near-term perspective and also taking into consideration the ratio chart above, the XLE may have some marginal further upside left into the mid-$60s before headwinds may stiffen again. Traders could look to play this marginal further upside while more tactical active investors may want to look out for the next bearish reversals to sell or sell short into this strength.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/xle-energy-select-sector-spdr-etf-energy-stocks/.

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