Get Ready for Even Bigger Swings in Oil

For much of the past year, the Energy Select Sector SPDR Fund (XLE) – an ETF that invests in oil and gas producers like Exxon Mobil (XOM) and Chevron (CVX) – has been caught up in a global battle.

On one hand, the Organization of the Petroleum Exporting Countries (OPEC) has made a series of production cuts (recently extended) in their efforts to prop up the oil price.

That supply squeeze is now seeing oil push the $100 per barrel mark.

On the other side, slowing global growth, particularly in China, is leading to a lower demand for oil.

This underlying supply-and-demand dynamic has caused some big swings – such as XLE’s 22% rally over the past few months.

Yet despite this huge move, XLE’s recent peak was no higher than where it was trading 12 months ago.

And with XLE retracing, today I want to see how things might play out from here.

Highly Volatile

On the chart below, you can see how choppy XLE has been.

The 10-day Moving Average (MA, red line) has made multiple moves in both directions.

But despite all that volatility, the 50-day MA (blue line) is tracking right around the same level as it was at the start of the year.

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

The other thing you’ll notice on the chart is the action of the Relative Strength Index (RSI). The RSI has flipped back and forth along with XLE’s changes in direction.

But today I’d like to concentrate on the action of XLE over just the past few months.

As the chart shows, XLE’s rally from mid-June coincided with two bullish technical signals:

1. The RSI built a base in May through June. Then it broke into its upper band in July, where it has remained since.

2. The 10-day MA crossed above the 50-day MA with both Mas tracking higher.

Yet XLE’s peak around the middle of this month came off the back of another common reversal pattern using the RSI.

As XLE was making those higher highs (upper orange line), the RSI was trending lower (lower orange line) from overbought territory (upper gray dashed line).

Take another look:

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

This sustained declining momentum put a stop to XLE’s rally. And it has since caused XLE to fall.

XLE is now down around 5% from that high with the RSI retesting support (green line).

So what am I looking for from here?

Looking for Confirmation

When the RSI similarly tested support in August, that level held. The RSI subsequently rallied higher.

That move saw XLE rally up to its high.

If the RSI can repeat that pattern here, XLE’s current uptrend could remain intact.

The next test would be for XLE to take out its September 14 peak ($93.69).

Beyond that, we’d look for the 10-day MA to accelerate above the 50-day MA as further confirmation of that up move.

However, as I said, action around the RSI right now is key – especially with it hovering around support.

If the RSI breaks into its lower band and stays there instead, it means that XLE’s current pullback has further to go.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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