Anyone who follows oil (or at least tosses it a side glance from time to time) knows that it has been stuck in a tight range for 2-3 months now. Following the “laws” of price action, expansion gives way to congestion and congestion gives way to expansion…eventually.
The energy sector has not followed suit though, since oil topped out in the first week of January, the sector has been pulling back steadily and has been pretty much the only sector to do so. I use the daily 100MA as a central trend and accumulation/distribution measure on my charts. It serves as a measure of trend of the next higher timeframe which would be a 20wk MA on the weekly chart. It’s easy to see that it is a decent measure of the long-term trend.
Support and resistance levels can tend to “pop” a bit more on higher timeframes as well. Notice some of the clear (to the penny sometimes) tests of S/R levels. Below is how I am seeing the major support levels without getting lost in the miniscule timeframes. From this view, it’s easy to see the last week of January and first week of February were tests of the 20wk MA. Then it broke and failed again the next week and now this past week has tested and failed again to get above its 20wk MA. This, along with the persistent downtrend on the daily chart is some evidence that a lower support level is on about to be tested.
Looking at the daily chart, XLE was trading inside a narrowing wedge from July through November 2016 before it broke out to the upside and completed a channel. It ended that move with a channel overthrow (a quick and sharp breakout that quickly gives back its gains). This kind of move often ends a channel’s primary trend for a while.
What I notice most about the way XLE has been trading recently is that the other support tests were very brief and bounced significantly each time. Since February began, however, XLE has tested its lower channel line twice. The first barely bounced and stopped dead at its downtrend line. The second break actually broke the channel intraday down to the previously tested early February low (more on that in a minute) before once again rallying and stopping dead at its downtrend line. This is not spelling out eager demand to me. Note also the energy sector Bullish Percent Index declining showing that more and more stocks in the energy sector are going on Point & Figure sell signals (basically lower lows and lower highs).
Periodically, I share the current sector strength rankings I use to identify the strongest and weakest sectors. XLE is persistently hanging on to the lowest strength rank (0 of 14) and has not been participating in the broad market rally and incredible strength we’ve seen since 2017 rolled in. I’ve highlighted the times when the Percentage of stocks above their daily 20MA’s was above 50% in blue (available on stockcharts.com). It tended to coincide with strength and vice versa when below 50%.
Blue dotted = Pcnt > daily 20MA’s, Red Solid = Pcnt > daily 50MA’s, Black = Pcnt > daily 100MA’s, White = Pcnt 6MA’s in uptrends
XLE’s rank weakness is reminiscent for me of IYT throughout October of 2016. It foreshadowed the fantastic run it took after the election along with a number of other sectors very well.
See for yourself how that turned out.
Within that context, let’s take a look at the hourly time period. It has clearly formed a descending triangle (a fancy way of saying lower highs and equal lows). Each time support is hit, it weakens. PPO momentum is just turning negative along with the 10hr moving average. I entered right here on Friday myself with a stop on a closing break of $73 which would break out of the downtrend line. So there is it is, hypothesis, stop and target (although I see potential targets for a decline anywhere between $64 to $66.
If it breaks out instead, that’s great, too, because that opens up a trade up to approximately $80 following the established XLE daily channel. Do you own due diligence, of course, and I wish you all luck.
Have a great week!