Oil has increasingly become a hot political issue in 2022…
Not just for its toll on individual motorists but for its impact on supply chains that has added to runaway inflation.
Today, the average pump price is now hovering around $5 a gallon.
And although rising gas prices have made headlines, this topic isn’t new.
When we last checked the Energy Select Sector SPDR Fund (XLE) on June 21 (red arrow on the chart below), it showed this oil rally started back in 2020.
But despite the long-term rally, there’ve been plenty of pullbacks – like the one we looked at on June 21.
Today, I’ll discuss what’s happened since then and what to watch out for from here.
Let’s pull up XLE’s chart…
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
On the chart, the 50-day moving average (MA – blue line) shows XLE’s long-term uptrend.
Throughout XLE’s rally, the short-term 10-day MA (red line) remained predominantly above the 50-day MA. This was another bullish signal.
However, that all changed last month…
In early June, XLE peaked when the Relative Strength Index (RSI) went into overbought territory (upper grey dashed line).
Then, as the RSI formed an inverse ‘V’ and retraced lower, XLE’s price also sharply reversed.
As the selling momentum gathered pace, the RSI broke through support (green line) and into the lower half of its band.
It was quickly approaching oversold territory (lower grey dashed line) when we last looked at it.
Now, take another look again…
Energy Select Sector SPDR Fund (XLE)
Source: eSignal
Since then, there have been two further technical developments…
- The RSI has now bounced out of oversold territory twice and is currently tracking higher.
- The 10-day MA has crossed back below the 50-day MA (a bearish signal).
However, given the current price action, right now I’m mostly watching the RSI…
As you can see, this double ‘V’ action in the RSI has coincided with XLE forming a short-term base (orange line).
If the RSI continues to track higher from here, we can expect XLE to hold support and form a base from which it can rally.
Then, if the RSI breaks back above resistance (green line) and into the upper half of its range, XLE could rally back up toward a short-term target of around $80.
Any long-term move higher would then depend on the 10-day MA crossing back above the 50-day MA.
But the short-term action around the RSI is key…
If the RSI instead runs up into resistance and fails to break higher – or simply continues to track in the lower half of its range – then XLE will find it much harder to hold short-term support.
This would leave XLE vulnerable to further falls.
And a break below support, along with declining momentum, could quickly lead XLE to trade back around $65.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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