If money is going to rotate into the Energy space, I think this would be a logical place for it to start. After breaking out of that consolidation in February, the Energy Sector SPDR ($XLE) has been selling off for almost two months both an absolute basis and relative to the rest of the S&P500.
Look at this chart of $XLE below. If we draw a trendline from the October highs and down through the January Consolidation, the extension of that resistance level takes us right here to potential support. This price also represents the 38.2% Fibonacci retracement from the October lows up to the February highs.
Now look at the relative underperformance plotted below the price chart. During the recent 10% correction in Energy, the sector has also underperformed the S&P500 for this entire two month period. But that down trendline of relative underperformance is being tested right now as well.
So we need to see two things. First, we want to start seeing higher lows in relative strength for $XLE. Until we see that, there is no point in bothering with this space. And for confirmation of a new uptrend (and continuation of the longer-term bull trend), we would like to see prices trading back above that early April gap lower. For the last 3 weeks, Energy was consolidating nicely but broke down Monday morning. If this (false?) breakdown is what was necessary to shake out some weak hands and test that 38.2% Fibonacci retracement, this could be a nice entry point. But I prefer to see prices get back above and hold on to that key $70.50 level.
$XOM $CVX and $COP are going to be key the components to watch here. Some of these Energy names have massive market capitalizations and will have a big impact the major averages. The US Stock market Indexes have struggled to make new highs without Energy’s participation. I fully expect this resistance to continue until Energy steps its game up.
Tags: $SPY $IYE