With investors laser-focused on tech stocks this year, many have missed other profitable trading opportunities.
One of those is oil.
The Energy Select Sector SPDR Fund (XLE) invests in a broad range of oil and gas stocks. Since its January low, XLE has rallied 15%.
By comparison, the Nasdaq has rallied around 13% over the same time.
I wrote about the potential for oil stocks to rally last month. That’s when we checked out XLE’s largest constituent, Exxon Mobil (XOM).
Yet XLE recently went into overbought territory. So let’s check if it’s vulnerable to a potential reversal…
Sharp Swings
The 50-day Moving Average (MA, blue line) shows XLE’s broad sideways trend last year.
Despite rallying strongly into September, XLE reversed and finished 2023 trading around the same level as March.
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
Within this sideways pattern, XLE was extremely choppy.
The shorter-term 10-day MA (red line) crossed the 50-day MA nine times in just over 10 months.
These direction changes coincided with sharp swings in momentum. The Relative Strength Index (RSI) zigzagged between its upper and lower bands.
And I want to concentrate on the action around the RSI’s upper levels today.
The RSI peaked and reversed from overbought territory in August and September (two left red circles). That coincided with XLE topping out and retracing lower.
Also, notice the action of the MACD during these XLE reversals.
When XLE reversed from these two peaks, the blue MACD line also crossed beneath the orange Signal line. Both then tracked lower.
I’m looking at these previous reversal patterns now because XLE’s recent strong run has again pushed the RSI into overbought territory (right red circle).
Take another look:
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
This alone is not enough to consider a short trade. The RSI often tracks along overbought territory when a stock is rallying strongly.
So let’s consider what we’d need to see for a potential trade setup…
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A Decisive Reversal
As with XLE’s reversals in August and September, we’ll need a clear change in momentum.
In August, the RSI formed an inverse ‘V’ and immediately fell. In September, the RSI tracked along the overbought line for some time before retracing.
So we need to wait for a decisive reversal before committing to any short trade.
On top of that, the MACD adds a whole other layer of confirmation.
In addition to the RSI’s clear reversal, we should pay attention if the MACD line crosses firmly below the Signal line (with both then tracking lower) before potentially entering a short trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict