Is That A Head & Shoulders Pattern In XOP?

We're excited to launch the US Sectors and Sub-sectors package for our Eagle Bay Solutions members. Paid subscribers receive weekly updates on all 10 S&P sectors like Energy, Financials, Technology and Utilities along with a long list of Sub-sectors like Regional Banks, Gold Miners and Solar stocks. Each ticker comes along with a multi-timeframe analysis of trend, momentum, relative strength, support & resistance, pattern recognition and risk management procedures.

Today I want to give an example of one of our charts on a daily time frame. This is the S&P Oil & Gas Exploration and Production ETF $XOP that consists of popular stocks like $KOG, $WNR and $AXAS. We are looking at a one year candlestick chart with a 14-day RSI plotted below.

Here we can see a very obvious Head & Shoulders topping pattern with a neckline that coincides with the 2013 highs. The top of the "Head" in this pattern is actually the 161.8% Fibonacci Extension target from the 2011 decline in price. So we should not be surprised to see that quick correction down to former support. Now, is this necessarily a bearish pattern? Not unless we break this key support around 72-73:

For now, based on the weekly time frame, an upward sloping 200 day moving average and uptrend line from 2013 lows, we still have to give the bulls the benefit of the doubt until proven otherwise by price. I would continue to be a buyer of this name as long as we are above these levels.

These head & shoulders reversal patterns rarely work out. Another scenario that can easily play out is a brief breakdown below this key support level that quickly reverses higher. This could easily create a squeeze that can escalate quickly. But we have our key levels. We only want to be long above this gray shaded area. Below that and things get messy.

Momentum is not offering much help here other than confirming the the new highs made this summer. But there aren't any divergences to speak of that can push us in either direction. I would keep tight stops above this level and if we do break, a tactical short might be more appropriate. But again, in that scenario we would only want to be short below the gray shaded area.

I really do believe this area is that important to supply and demand. We pride ourselves in keeping an open mind and having a road map to help us make decisions based on future price action. In this case, we can be long or short from a tactical perspective depending on what happens in the coming week(s).

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Tags: $XOP