A Look At Energy On Multiple Timeframes

We are thrilled to announce that we're rolling out our new Eagle Bay Solutions research package this week that includes all of the S&P Sectors and relevant Sub-sectors. Members will receive over 50 annotated charts with commentary each week featuring everything from Financials (XLF) to Utilities (XLU) to Gold Miners (GDX) along with the most highly followed Sub-Sectors like Regional Banks (KRE) and Biotechnology (XBI).

Today I want to focus on one particular sector that stands out and I think is a good example of what our new product will offer our members. The first chart shows the weekly candlesticks for Energy $XLE with a 14-period Relative Strength Index to measure momentum along with Relative Strength plotted below that compares Energy to the S&P500.

You'll notice that prices are currently above the 2008 highs after breaking out this Spring. Structurally as long as prices remain above these highs, the bulls are very much in control big picture. Momentum is still in a strong bullish range that goes back to the bullish divergence that helped mark the bottom in early 2009.

The one thing I don't like is the lack of relative strength. You can see plotted at the bottom $XLE vs $SPY is still in a strong downtrend. I would want to see a breakout above the June highs to confirm that a new uptrend in relative strength has emerged. In the meantime, more of a neutral stance in RS is likely our best bet. I am also watching this 50 week moving average (dotted line) that has helped serve as nice support in price over the last few years. I'm happy to stay bullish while we're above that Moving Average and 2008 former all-time highs.

We like to use weekly charts with relative strength to get more of a structural perspective and then work our way down to a daily timeframe for execution and risk management. Here we are looking at the daily candles along with 50 and 200 day moving averages.

What stands out to me is the brief breakdown below support from early August that previously served as resistance throughout May. We are now trying to get back above that key area shaded in gray and from a tactical perspective, we would only want to be long above it. Momentum remaining in a bullish range is another feather in the hat for the bulls:

Notice how in recent price corrections momentum, measured by a 14-day relative strength index, never reached oversold conditions. This is the type of action we like to see when we are bullish on a particular name: stock, commodity, currency or otherwise.

Target wise, I think we can at least get back to the early summer highs, especially if we get upside follow through Wednesday in the Energy space. If indeed we do break through that down trendline from the July highs, then it would be the third test of this roughly $101 resistance. The more time that a level is tested, the higher the likelihood that it breaks. A breakout to new highs would give us a target near $107 based on a 161.8% Fibonacci extension from the June-September correction.

Based on the structural setup here that we see in the weekly chart, bullish momentum on both weekly and daily timeframes, and most recently the failed breakdown below key support and former resistance, the benefit of the doubt here definitely has to go to the bulls. This is especially the case from a risk/reward perspective as we only want to be long tactically if we are above the gray shaded area.REGISTER HERE to become a member of Eagle Bay Solutions and receive weekly multi-timeframe updates on the Energy sector along with over 50 additional sector and sub-sector charts.