Energy stocks as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) led the gains in Monday’s trading session. The XLE rallied 2.38% as oil prices rose and the U.S. dollar took a pause in its recently sharp rally. While plenty of components of this ETF looked good on Monday,ConocoPhillips (NYSE:COP) particularly stood out to me through a technical lens as COP stock scored a breakout of its six-month trading range.
Energy sector bulls should take notice.
The financial media credited Monday’s gains in energy stocks to investors anticipating a further oil production cut agreement at the upcoming OPEC meeting on Nov. 30, which led to the oil rally.
Through a purely structural lens, however, Monday’s gain by the energy sector was simply a continuation of the sector and group rotation theme that has become increasingly apparent since early November. Financials, industrials and the transportation stocks were the initial beneficiaries following the U.S. presidential election results.
But this quickly spilled over into other parts of the market as market participants looked to put capital to work in things that looked less overbought in the immediate-term. As such, the “threat” of a deeper oil production cut from the upcoming OPEC meeting also served as a good excuse to move money into energy stocks, which largely speaking had not yet seen any meaningful rally this month.
Let’s look at the technicals of COP stock.
ConocoPhillips Stock Charts
Looking at the multiyear weekly chart, we see that after a vicious 18-month downtrend, COP shares began to stabilize early this summer. This has led to a breakout of the two purple lines (i.e. the down-trending channel).
From a momentum perspective, note that the relative strength index (RSI) had bottomed in August 2015 but price continued to drop until the lows this past February.
At that time, COP stock had once again reached the lower end of the down-trending channel and the RSI indicator made an important higher low.
This so-called positive divergence is what I like to see at important price bottoms.
On the daily chart, we see that after ConocoPhillips’ initial V-shaped reversal off the February lows, shares started to fall into a sideways trading range by late April. This sideways trading range allowed the medium-term moving averages (50-, 100- and 200-day) to coil together and over the past couple of weeks begin to slightly turn higher.
Monday’s rally in the stock led to a marginal break out of the sideways consolidation phase while the MACD indicator at the bottom of the chart is also pushing higher.
From here, traders and active investors alike could look to try COP stock from the long side using a first upside target through a multiweek/multimonth lens near the $50 mark.
Any notable bearish reversal should be respected as a potential stop-loss signal.
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