Time for a Relative Breakout in Energy?

It might be about time for Energy to start making some moves. It’s been well documented that the energy sector, specifically $XLE, has been underperforming the rest of the stock market for two solid years. But I think that enough pressure has built up during this recent consolidation that we can expect a major move in energy on a relative basis.

Take a look at this chart below. It shows Energy represented by the $XLE compared to the S&P500 $SPY. This 4-month wedge formation has an upper trendline following closely along the 50 & 200 day moving averages (blue & red dotted lines):

1-15-13 XLE vs SPY I think that the Relative Strength Index is also giving us a good sign as it has not reached oversold conditions since the beginning of the summer. This supports our belief that Energy has been, and still is in a bull market relative to the S&P500. A breakdown below this year’s lows in relative prices would invalidate this notion. But a breakout above the above mentioned resistance factors would confirm the breakout and probably bode well for equities as a group. Some of these integrated names like Exxon and Chevron have humongous market capitalizations and are heavy in the cap-weighted averages.

There are some fascinating developments going on here that we’ll be monitoring closely.