After a two-year bull run, oil has had a very mixed 2023.
The Energy Select Sector SPDR Fund (XLE) is an ETF that invests in oil and gas producers. It has 42% of its holdings tied up in just two stocks: Exxon Mobil (XOM) and Chevron (CVX).
And it was recently trading right back where it was in early January.
That’s despite OPEC+ production cuts, geopolitical unrest, and a U.S. economy that’s still adding jobs. Those are all factors you’d expect to send the oil price rallying.
But XLE’s longer-term sideways pattern has still offered plenty of short-term tradeable swings.
Look at XLE’s rally from March into April (before it sharply reversed).
Or there was XLE’s two-month rally from late June – before it peaked and rolled over in September.
Yet today, I want to concentrate on XLE’s more recent action.
It was much smaller than XLE’s previous moves…
But it still produced a tidy 35.8% gain for members of my options advisory, The Opportunistic Trader.
What’s more, that gain came in just eight days despite the trade initially not going our way…
Capturing a Countertrend Rally
On the chart below, you can see XLE’s rally from June through September.
After peaking on September 14, XLE reversed andwent on to make a series of lower highs (and lower lows). That’s a common bearish pattern.
Energy Select Sector SPDR Fund (XLE)
Source: e-Signal
We can see XLE’s reversal from its September peak inthe action of our moving averages (MAs).
The 10-day MA crossed and accelerated below the 50-day MA. And both MAs dropped.
But even within this downtrend, there were a number of smaller countertrend rallies.
The RSI sparked the first one in September by rallying off support (green line). The remaining moves came with the RSI bouncing off (or near) oversold territory.
The decisive pattern in each of these rallies was the RSI swinging higher.
And a repeat of this move helped provide the setup for the long XLE trade we opened on December 6.
That long trade involved buying an $82 call option with a February 16, 2024, expiry.
Yet other factors contributed to us making that trade.
The release of an oil inventory reporthad sent crude oil down another 4% and extended its slide. That was despite OPEC’s continued threats to cut oil production.
Put simply, prices had overextended themselves to the downside beyond what the fundamentals were telling us.
I’ve also learned over many years that prices tend to revert to the mean after the initial move following economic indicators (like oil inventory reports).
That applies in either direction.
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We aimed to capture this mean-reversion characteristic with our trade.
But as the chart shows, after opening our position, the trade didn’t initially go our way. Instead, XLE tracked sideways over the next five trading sessions.
Take another look:
Energy Select Sector SPDR Fund (XLE)
Source: e-Signal
Momentum was returning, though (orange line). That was pushing XLE higher.
And we closed out our trade on December 14 by selling our call option for a 35.8% gain.
Of course, we generated this return in a short period by trading options. Options often magnify our profits compared to trading the stock itself.
Yet this trade shows that even a tiny underlying move can still supply us with some handy gains.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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Do you expect another rally for oil? Send us your thoughts at [email protected].