Why You Must Watch Oil Even More Closely Right now

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It’s been a big year for oil…

As soon as 2022 kicked off, the oil price went on a massive rally. In around six months, the Energy Select Sector SPDR Fund (XLE) rallied 70%.

However, with the oil price overheating, XLE had a big pullback after peaking in early June. By the time XLE bottomed out in July, it had given back 30% of its gains.

Since then, XLE has been slowly but relentlessly grinding higher. And in just the past couple of weeks, it has taken out its yearly high.

Now, XLE is looking overextended again. So today, we’ll check out what’s in the cards from here…

Two Key Signals

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

From January to June, there was a huge rally followed by a pullback. Then, the current bull run began in mid-August…

Take a look at the XLE chart…

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

The strong rally in the first half of 2022 was supported by two key signals in the Relative Strength Index (RSI)…

1. Throughout the rally, the RSI remained mainly in the upper half of its range (above green line).

2. The retracements against that uptrend typically coincided with the RSI forming an inverse ‘V’ and reversing from overbought territory (upper grey dashed line) – as shown by the red circles.

The rally that began in July (after XLE’s 30% pullback) also topped out when the RSI reversed out of oversold territory in August (fourth red circle).

And the retracement after the August peak lasted right through until the RSI went into oversold territory (lower grey dashed line) in late September.

After the RSI formed a ‘V’ and then bounced higher, XLE’s current rally began.

When we last looked at XLE on October 6 (red arrow), the RSI had just broken through resistance and had gained a foothold in the upper half of its range.

Take another look at the chart…

Energy Select Sector SPDR Fund (XLE)

Source: eSignal

Since then, we’ve seen two further bullish moves from our MAs…

1. The 10-day MA broke back above the 50-day MA.

2. The 10-day MA has continued to accelerate above the 50-day MA.

However, the pattern that’s now forming in both the RSI and XLE stock price is warning me that we need to be ready for a potential change in direction.

So, what am I looking for around here?

Vulnerable to a Correction

In the bottom half of the chart, you can see the RSI has made an inverse double ‘V’ out of overbought territory.

You’ll also notice the second inverse ‘V’ had a lower peak than the first.

We also need to watch for the RSI’s next move…

If the RSI reverses off the lower orange line and makes another lower high, then that’ll add further confirmation that buying momentum is waning.

And that’s critical to what happens in the top half of the chart. Recently, XLE has made higher highs (upper orange line)…

If XLE’s stock price continues to climb while the RSI continues to make lower highs, then eventually the lower buying momentum will pull the stock price lower too.

This means XLE is vulnerable to a correction.

The good news for us is that a short trade might not be far away.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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– Larry A.

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