Energy Select Sector SPDR (ETF) (XLE): A Buy Signal You Can’t Miss

Advertisement

When oil prices move significantly in one direction or another, investors sit up and take notice. Case in point, OPEC agreed on Wednesday to its first reduction in oil production in eight years. The price of oil rallied 5%, which led to a broad-based rally for risk assets. Barring a complete reversal by OPEC of this initial agreement, the S&P 500 energy sector — as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) — looks set for a continuation of Wednesday’s rally. The XLE ETF now offers traders and active investors well-defined technical support, and thus clear risk/reward parameters.

Beat the Bell: Energy Select Sector SPDR (ETF) (XLE)Personally, I’m not a big fan of trading around OPEC statements. However, when price action makes a clear enough statement off important technical support/resistance areas, and it lines up with news flow like it did Wednesday … I’ll take a stab.

On Wednesday, I placed a few phone calls with hedge funds, and the more cautious of them pointed out that OPEC oil production is now “only” one-third of total global output, and thus less significant. Others reiterated that despite an increasing focus away from fossil fuels, oil prices still are very intertwined with the global economy and thus should not  be discounted, as was evidenced by Wednesday’s rally.

While the S&P 500 might still be stuck in a “boring” multimonth range, under the surface we continue to see sector or risk asset rotation (such as the oil and oil stocks rally Wednesday). For now, this is keeping risk appetite (and hope) alive. But I will also point out that this week marks the month’s and quarter’s end, which leads fund managers to chase performance (e.g., buy winning stocks). Also, next week, we enter the seasonally choppy month of October.

So I’m keeping a short leash on my bets.

XLE ETF Charts

The weekly chart of the XLE ETF shows that oil’s drop in 2014 broke the fund below its 2009 support line later that year. The rebound off the January 2016 lows has since pushed the XLE back up to its blue 100-week simple moving average, which it’s toying with again after Wednesday’s rally. This moving average currently also broadly speaking coincides with horizontal resistance (red dotted line).

From this angle, energy stocks are near an important spot. If the XLE can overcome the $70 to $72 on a weekly closing basis, then we could see more upside into the mid-$70s over the next few weeks.

XLE ETF weekly
Click to Enlarge

However, until a better next bullish development takes hold on the bigger picture above, the daily chart of the XLE has more “conservative” upside price targets to tag.

Wednesday’s 4.32% rally in the XLE ETF materialized after it marked its chart with a “doji” candle right at the black up-sloping support line on Tuesday. This qualifies as a trading “buy” signal, and indeed, my personal “B2 Reversal” indicator flashed a buy signal on Wednesday as marked by the green up arrow (highlighted by the blue arrow).

XLE ETF daily chart
Click to Enlarge

From here, a next upside price target for the XLE is $72 to $72.50. Traders should use any meaningful daily bearish reversal — and as a last resort, Wednesday’s intraday lows — as a stop-loss.

Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Download Serge’s Free Special Report: 6 Keys for Successful Trading and Investing.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/energy-select-sector-spdr-etf-xle-buy-signal/.

©2024 InvestorPlace Media, LLC