After a massive 480% rally from its March 2020 lows, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) topped out in June 2022.
The rally was so strong that XOP gained around 40% in its final month.
However, after a brutal reversal, XOP lost over a third of its value by the start of July.
After bottoming out, XOP worked its way higher in the latter half of 2022, before rolling over into the end of 2022.
Despite promising signs in early 2023, XOP has once again come under pressure.
And recently, XOP has bounced off a key level. So today we’ll see what’s in store for the volatile world of oil…
Classic Bullish Pattern
On the chart below, you can see the nearly vertical rally that took XOP up to its peak at ‘A.’
However, that rally’s strength pushed XOP into overbought territory. And it soon turned sharply lower…
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Source: eSignal
XOP’s downturn coincided with the Relative Strength Index (RSI) making an inverse ‘V’ and reversing from overbought territory (upper grey dashed line).
Then, the fall accelerated. The RSI tumbled through support and into the lower half of its band.
After bottoming out, XOP formed a base in July at ‘1,’ and the RSI gradually built support (red line).
From there, XOP made a classic bullish pattern with consecutive higher highs (‘2’ and ‘4’) and higher lows (‘1’ to ‘3’).
However, those peaks at ‘2’ and ‘4’ both reversed. And the RSI turned down and tracked lower from overbought territory.
When we looked at XOP on January 19 (red arrow), it had just made another higher low at ‘5.’ The RSI and XOP’s stock price were converging (orange lines), which is a common reversal pattern.
Since the RSI had just broken through resistance, we were looking to see if XOP could repeat its bullish pattern and reach another fresh high.
But as you can see on the chart, that move never panned out. Take another look…
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Source: eSignal
Although the RSI did break into its upper range, it never gained a firm footing. Instead, it zig-zagged along support before heading lower.
It was a similar story with our two MAs…
While the 10-day moving average (MA – red line) briefly broke above the 50-day MA (blue line) – a bullish sign – it too ran out of momentum.
Now the 10-day MA is tracking back below the 50-day MA, and the RSI is in its lower band. So, what can we expect from here?
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Stay Vigilant for Trades
Recently, the RSI made a ‘V’ (right red circle) and bounced off oversold territory (lower grey dashed line).
When the RSI showed a similar pattern in late September (left red circle), XOP made its higher low at ‘3’ and rallied up to its higher high at ‘4.’
This move occurred only because the RSI travelled all the way from oversold to overbought territory.
However, even if the RSI doesn’t traverse its full range this time, it could still provide the setup for a potential long trade if it rises at or above resistance.
A quick bounce to $130-$135 could be in the cards. But as always, we need to remain vigilant…
If the RSI’s bounce fades quickly (and the RSI stays stuck in its lower band), XOP could turn around and make another leg down.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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Reader Mailbag
In today’s mailbag, a member of The S&P Trader thanks Larry for his successful trade recommendations…
Hello Larry, thank you for all your fantastic trades! For the first time in a long time, my brokerage margin is now gone and I’m up $40,000. And I’m positive $20,000 in my SPXW trades since January 4, 2022. I’m looking forward to all your future trades.
– Mark A.
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