Thus far 2017 has been rough for energy stocks. They stumbled right out of the gate and have been trying to find their footing ever since. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) is now down 3.7% year-to-date, making it the worst performing sector by far.
But XLE bulls shouldn’t give up hope. Support looms large and the time for a rebound is nigh. Yesterday’s sharp intraday reversal is catching the eye of chart watchers everywhere. The early morning descent was stopped dead in its tracks.
By day’s end, XLE carved out a sweet bullish hammer candle on heavy volume. Couple that with the oversold conditions for the sector and we can finally make the case for a bullish play.
Of course, the strength out of the stock market at-large certainly isn’t hurting either. It’s unlikely that energy stocks will continue plumbing the depths if the broader market remains strong.
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The 200-day moving average is coming in hot for XLE and is as logical a level as any for buyers to finally make a stand.
Additionally, we just filled the significant gap from last November. And as any technician knows, gaps, once filled, often become support zones.
How to Buy the Energy Stock Dip
While we could certainly go for the gusto by purchasing call options on energy stocks, let’s instead create a higher probability play with a bull put spread.
If you think XLE remains above $69 for the next month, sell the March $69/$65 bull put spread for 53 cents. You will pocket the net credit if the XLE ETF sits above $69 at expiration.
The max risk is limited to the distance between strikes minus the initial credit, or $3.47, and will be lost if energy stocks bite the dust taking XLE below $65. To minimize the damage, I suggest closing the trade if the ETF falls below $67.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
