After Its Massive Run, Let’s See If Oil Has Further to Fall

I’ve been closely watching the oil sector all year.

The Energy Select Sector SPDR Fund (XLE) is an oil and gas exchange-traded fund. It’s dominated by oil behemoths Exxon Mobil and Chevron. These two companies make up almost half of XLE’s holdings.

XLE rallied 25% in under three months. By comparison, the Nasdaq gained 14% over the same time.

But when we checked in on XLE in April, it was showing signs of overheating. I warned that it was in danger of a pullback.

I was right. Since then, XLE has reversed. So let’s check today if that fall has further to go…

Overbought Territory

Take a look at the chart below.

XLE’s rally this year began with the Relative Strength Index (RSI) forming a double “V.” It surged higher from near oversold territory (lower gray dashed line).

The stock flatlined in February, with the RSI retesting support. Then the uptrend accelerated, with the RSI tracking higher into its upper band.

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

You can gauge the strength of that rally by the rate of the 10-day moving average (MA) accelerating above the 50-day MA. That in turn pulled the 50-day MA sharply higher as well.

The blue moving average convergence/divergence (MACD) line also rose. It crossed the orange signal line and kept moving higher until XLE’s rally stalled in early April.

This coincided with the RSI peaking deep inside overbought territory (upper gray dashed line).

Around this time, the red arrow shows when I warned readers in April about a potential pullback.

XLE then reversed, with the RSI making an inverse “V” and tracking lower.

The MACD also rolled over and fell quickly. Take another look:

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

As the chart shows, the two MAs have also been closing in on each other and just recently crossed.

The RSI is hovering right around support/resistance (green line), and the MACD is right on the zero (0.00) line.

So what should we look for next?

Sliding Momentum

The main thing I’ll watch from here is what happens with the RSI.

If the RSI drifts below resistance and gets stuck in its lower band, XLE’s fall will have further to go.

So we could soon see XLE trading back around $90.

We’d also look for the MACD to drop into its lower range and see if the 10-day MA falls further below the 50-day MA, with both MAs tracking lower.

If this plays out, XLE’s retracement could develop into a much bigger down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict