Stocks are hurting. No doubt about it.
Of the last five weeks of trading, the S&P 500 has closed down for all but one of them.
But there are some bright spots in this current market environment.
For instance, the energy sector could be developing into a great opportunity…
Now it’s true that energy’s also taken a bit of a beating. The energy select sector ETF (XLE) has pulled back over 7.5% since putting in a top on April 12.
But XLE is currently trading into some technical support. It’s time to see the ETF start staging a comeback.
XLE has now hit its 50-day moving average. And coincidentally, this also lines up with the October 18 closing price of $91.96.
And at the same time, XLE is also tracing out a bullish flag pattern.
Let’s take a look at a chart of XLE below. I’ll explain why this combination of technical elements could be bullish for the ETF.
The reason this $91.96 price level is significant is because it marks a major previous top in XLE.
Since putting in that top on October 18, XLE dropped over 14%, eventually finding a bottom on January 18. And then on March 18, XLE finally broke above that $91.96 level.
Markets have memories. And when an important price level gets broken as resistance on the way up, it often flips into a support level when the market starts pulling back.
The only issue with this technical setup is that XLE hasn’t yet reached oversold levels on some key momentum indicators like the Relative Strength Index (RSI).
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To reach oversold conditions, we need a reading as low as at least 30. XLE has registered a reading of 38 so far.
That means it’s possible XLE needs to trade a bit lower still before selling pressure is exhausted.
This is why we need a piece of clearly bullish price action before getting into the trade.
That’s where the bull flag (orange lines) come in.
If prices can break through the upper trendline of the pattern, that would be a clear sign of bullish intent.
It’s important not to enter the trade before this event takes place. If there’s no breakout, then the market will continue to trade lower.
If XLE trades lower, it will eventually reach those oversold conditions. And that means a new potential setup will take shape.
Happy trading,
Imre Gams
Analyst, Market Minute