The price of oil has experienced a historic drop and major volatility of late. One group of oil-related stocks, however, as represented by the Oil & Gas Explore & Prod. ETF (NYSEARCA:XOP), showed remarkable absolute and relative strength in recent weeks. Active investors and traders may look to buy the XOP ETF for a trade.
The energy sector of stocks in the S&P 500, despite being the big loser year over year, over the past month has been the big winner. Part of this can be attributed to mean-reversion (i.e. the rubber band gets stretched too far, then snaps back), a concept I often discuss in this column.
The other part is notable relative outperformance by large oil company stocks as investors try to look beyond the near-term. Additionally, some investors are looking to these stocks for their relative dividend ‘safety.’
XOP ETF Stock Charts
On the long-term chart we see that the XOP ETF in February began to break down below its 2016 and 2009 lows. By the first half of March, this led to a record low reading in the weekly RSI indicator at the bottom of the chart.
Through the lens of this bigger picture chart, ultimately a mean-reversion higher back toward the yellow horizontal in the low $80s is an upside target that investors with a longer time horizon may aspire to.
While the price of oil continued to collapse in recent weeks, the XOP ETF began to stabilize and by early April started a sharp rally. All of this resulted in some amazing relative strength of these oil and gas companies relative to the price of oil.
While the price of oil at some point will most likely begin to stabilize and move higher again, I prefer to position myself in select energy stocks via the XOP ETF, as opposed to directly via a long position in the price of oil via ETFs or futures.
Finally, on the daily chart we see that XOP from mid-March to the present carved out a bullish pattern that I will label a ‘cup and handle’ formation. This popular and bullish technical formation consists of a first rounding bottom (the cup), which is then followed by a consolidation pattern (the handle), i.e., the smaller green half-circle on the chart.
I like buying the XOP ETF in the $44-$46 area. My upside target is $50 and the stop loss is at $40.
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