Buy the Oil Stocks Dip with the Energy Select Sector ETF

Advertisement

XLE ETF - Buy the Oil Stocks Dip with the Energy Select Sector ETF

Source: Shutterstock

Crude oil is suffering one its largest down days this year. And that has oil stocks on the ropes. The Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) has fallen 3% in this morning’s trading — shattering the 20-day moving average in the process. Since this is the first major pullback seen since the XLE ETF broke out and started running, it presents a tasty opportunity for would-be buyers.

Let’s take a look at where support may come into play and then we’ll build out a plan for exploiting the inevitable bounce.

The first method for identifying potential turning points is to focus on prior pivots and congestion areas. With that in mind, the three-week base formed in late-April to early-May is our first stop. In fact, with today’s drubbing, XLE is now probing the zone.


Click to Enlarge
Source: OptionsAnalytix

If buyers are quick on the trigger, we could see support form in the upper half of the range. Otherwise, $72.50 is in the cards. And that, arguably, is the more important threshold for bulls to defend. A breach below it would upend the uptrend and make a mess of the chart.

The nosedive at the end of January is just the scenario we’d like to avoid. From a moving average perspective, the 50-day is also coming in hot and will meet prices in the $72.50 area if they continue to retreat. I consider this yet another reason why chart watchers want it to hold.

Buy the XLE ETF Dip

Right now the implied volatility rank for XLE ETF options is 42% which makes it one of the highest among sector funds. I’m thinking bull put spreads are the way to go here.

If you’re willing to wager oil stocks get bought and XLE can remain above $70 by July expiration, then sell the July $70/$66 bull puts for 60 cents.

When attempting what could be considered a knife catch, I’ve always found it helpful to scale in. That way you have multiple chances to nail the reversal. To employ the tactic with this trade idea you might sell half of your bull puts now but wait to sell the other half for a credit around 80 cents. This will raise your average credit if XLE ends up falling further from here before rebounding.

As of this writing, Tyler Craig held bullish options positions in oil stocks via XOP. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/energy-select-sector-spdr-etf-xle-etf-oil-stocks/.

©2024 InvestorPlace Media, LLC