The post-election love for stocks has finally moved into the energy sector. Oil prices, which were falling alongside silver and gold, are finally seeing buyers rush in. Crude futures wafted up 4.5% in early morning trading and energy stocks across the board are benefiting. Solid gains are lifting the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) to a pivotal resistance level bringing opportunity in its wings.
Just a bit more rotation into energy stocks and we’ll have a stellar XLE breakout.
For the uninitiated, the XLE ETF boasts such heavy-hitters as Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), and Schlumberger Limited. (NYSE:SLB) among its top holdings. Rather than traversing the treacherous stock-picking route, many traders use XLE to trade the entire energy sector.
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As shown in the accompanying weekly chart, the ongoing XLE recovery has been stymied again and again by the $72 price level. It has thus far been an impenetrable ceiling.
But energy stock lovers should take heart: The more this level is tested, the weaker it becomes. And with the Trump-infused rotation seizing stocks, I suspect the time for an XLE breakout is finally at hand.
Further buttressing the appeal for a bullish play is the utter lack of overhead resistance for the energy sector until the 200-period moving average looming at $77.70. That leaves a good $5-plus of upside in the coming weeks.
The XLE Trade
Option prices aren’t particularly expensive these days, so consider going for the jugular with a straight call purchase.
Buy the Jan $70 call for around $3.20. Your risk will be limited to the initial $3.20 debit and will be lost if XLE sits below $70 at expiration. To minimize the loss I suggest bailing if the fund slices below support at $67.
The reward is unlimited offering unfettered participation if energy stocks really go the distance into year end.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
