This Oil Sector Could Soon Go Oversold

The huge oil rally at the start of 2022 saw giants like Exxon Mobil and Chevron enjoy a massive boom.

However, big oil and gas producers weren’t the only ones along for the ride…

Another related sector – the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) – also rallied, gaining around 80% from January to early June.

But after hitting that peak, XOP reversed sharply… dropping 37% in a month. Since then, XOP has been gradually grinding higher.

However, after topping out in November, XOP has spent the last month retracing. So today, we’ll see if that pullback is fizzling out and what we can expect from here.

A Repeating Pattern

On the chart below, the 50-day moving average (MA – blue line) shows XOP’s long-term trend.

We see the strong rally from January through June, then the pullback followed by XOP’s gradual rise. XOP’s higher highs (‘A’ and ‘B’) show the latter.

Check out XOP’s chart…

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Source: eSignal

As the 10-day MA (red line) shows, XOP has been through some pretty decent swings during this uptrend.

After peaking in June, XOP reversed sharply when the Relative Strength Index (RSI) formed an inverse ‘V’ from overbought territory (upper grey dashed line).

That reversal, along with the RSI bearishly breaking into the lower half of its range (below the green line), saw XOP drop 37%.

Then, as the RSI began to trend higher (red line) from oversold territory (lower grey dashed line), XOP was able to find a base and steadily climb higher.

Since then, two almost identical patterns have developed…

First, there’s the rally to ‘A,’ which peaked and reversed – with the RSI again making an inverse ‘V’ (orange circle) from overbought territory.

Then the RSI retraced and broke into its lower band. This pullback petered out and reversed again, with the RSI making a ‘V’ in oversold territory (red circle).

Then the pattern repeated (so far) with the rally up to XOP’s higher high at ‘B’ – where again it reversed along with the RSI forming an inverse ‘V’ in overbought territory (second orange circle).

Take another look…

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Source: eSignal

With XOP’s pullback from ‘B,’ the RSI is again forming a ‘V’ in oversold territory (second red circle).

I’m now looking to see if XOP will make a higher low before rallying up to a new potential ‘C.’

So what am I looking for around here?

The Bounce Off Support Is Key

Well, what happens next with the RSI will be key…

Since it recently formed a ‘V,’ the RSI will need to keep trending higher for XOP to lock in a short-term low.

Then, if the RSI tracks back up toward resistance, we should see XOP enjoy a quick bounce.

Any longer-term uptrend beyond that will rely on the RSI breaking up through resistance and gaining a foothold in the upper half of its range… just as we saw in XOP’s long-term rally in the first half of the year… and more recently in the rallies up to ‘A’ and ‘B.’

However, if the RSI’s bounce peters out and it begins to meander along the oversold line, then any bounce in XOP will be short-lived.

And that would likely mean that XOP’s downtrend still has further to go from here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a One Ticker Trader member thanks Larry for another successful trade recommendation…

I’m passing along a “win-win” on SPY. On December 7, I got in at $409, out at $550, and back in at $409. On December 8, I got out at $560. They were nice 34.47% and 36.92% gains in less than 24 hours! Thank you!

– Joe K.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day at [email protected].