Last Wednesday, the market rallied when inflation data came in lower than expected.
But as I wrote on Friday, inflation running at 8.5% isn’t good news.
Especially because many of the commodities that caused inflation to drop from the previous month – like oil and agricultural commodities – have recently rallied off their July lows.
That’s why on August 8, I wrote about the Energy Select Sector SPDR Fund (XLE) which includes companies from the oil, gas, and energy industries.
At the time (red arrow on the chart below), XLE had reversed sharply from its recent high but was showing promising signs of an emerging rally.
But I warned that we can never be complacent when it comes to oil, as it can change direction quickly.
Since then, there have been some key developments. So, today we’ll see what’s in store for XLE.
Check out XLE’s chart…
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
In early June, XLE experienced a pullback when the Relative Strength Index (RSI) reversed strongly out of overbought territory (upper grey dashed line).
As the RSI fell straight down into the lower half of its range, XLE’s stock price also retraced sharply. And the 10-day moving average (MA – red line) crossed below the 50-day MA (blue line) at a steep angle.
But then, a common chart pattern signalled a potential change in direction…
After XLE made a series of lower lows while the RSI made higher lows (orange lines), XLE’s selling pressure started to wane.
Once the RSI broke into the upper half of its range, XLE rallied to its July high before reversing lower again.
Last week, I wrote that we needed to see two clear technical signals for XLE’s rally to resume…
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The RSI needed to break back up through resistance (green line).
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The 10-day MA needed to break back above the 50-day MA.
And XLE’s next test would be to break back above its $78.66 July high.
Since then, how have these signals played out?
Let’s take another look at the chart…
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
Within the past week, the RSI has broken up through resistance and XLE’s stock price has broken back above the 50-day MA. XLE is now trading close to its July high.
But for this rally to gain traction, the RSI needs to remain in the upper half of its band and XLE needs to break above its July high.
However, the real test will be the action of our two MAs…
Although the 10-day MA has yet to break above the 50-day MA, the gap between the two has been shrinking.
If the 10-day MA breaks firmly above the 50-day MA and accelerates higher, then this rally could go further.
While that might not be goods new for inflation, it could provide the setup for a long and potentially profitable trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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