Profit-taking struck crude oil and energy stocks this week, and it’s about to get a little worse thanks to the disappointment by Exxon Mobil Corporation (NYSE:XOM). But don’t let the spate of down days deter you. The energy sector — as reflected by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) — remains one of best-looking sectors, pullback notwithstanding.
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Credit belongs in large part to the ongoing recovery in the oil patch. Crude futures are up just shy of 50% since finally bottoming at $26.05 earlier this year. XLE has followed in-kind staging a 39% rebound of its own.
The duration (and magnitude) of the energy stock resurrection has been sufficient in turning the long-term trend of XLE higher for the first time since the oil bloodbath began a few years ago. For proof, look no further than the 200-day moving average, which is now ascending.
With higher pivot lows now pockmarking the landscape, I suspect the current dip will be snatched up like all its predecessors.
Friday morning’s earnings releases from heavy hitters Exxon and Chevron Corporation (NYSE:CVX) have the potential to throw a wrench into the budding recovery. The pair of oil giants comprise 30% of the XLE ETF, so any kind of earnings oopsie is sure to bring the pain, at least in the short run.
I don’t expect too many fireworks, though. Short of a few exceptions, most earnings reactions for XOM and CVX have been tame, even with the oil price plunge, and it looks like that’s what we’re shaping up to get.
The bulk of the haircut for Exxon Mobil and Chevron have actually come outside of their respective quarterly events.
XLE Put Spreads Are Primed for Profits
Traders looking for a high-probability avenue for scoring on further strength out of the energy sector should consider selling December bull put spreads. To create a wide profit range and allow the 200-day moving average to halt a deeper retracement, sell the Dec $65 put (which sits below the 200-day) and buy the Dec $61 put. The $4-wide vertical can be sold for 53 cents offering a potential 15% return on your money.
The max loss, and therefore cost, of the trade is $3.47 and will be forfeited if XLE slips below $61. To minimize the risk, I suggest bailing on a significant break of the $65 level.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
