The rebound rally in the crude oil at the start of the week not only helped the futures market, but it also helped drive the Dow Jones Industrial Average and S&P 500 Index into fresh all-time highs. With oil at its highest level since the week-ending December 4, it seems like a good time to revisit the S&P Energy Select SPDR ETF (XLE) and Exxon Mobil Corporation (XOM).
The last time I covered these two equity markets was the week-ending February 25. At that time, crude oil was building its support base and the stock market had just reached its low for the year.
At that time, I wrote the following:
“We have a few interesting divergences developing between oil-related stocks and crude oil prices. This may mean that investors are realizing that the oil companies may have reached key value areas, and that they are finally getting a grasp on the impact of lower crude oil prices on their company’s bottom-line.”
“In these cases, you can see that the stocks or the ETF did not follow crude oil prices lower during its current sell-off. This could be a sign that buyers are coming in to support these equities or that the selling pressure is subsiding. I can’t identify a buy signal yet but the price action suggests that the XLE (S&P Energy Select Sector SPDR Fund), XOM (Exxon Mobil) and CVX (Chevron Corporation) should be on your investment radar. “
Since that time, improving fundamentals in the oil market and…
The rebound rally in the crude oil at the start of the week not only helped the futures market, but it also helped drive the Dow Jones Industrial Average and S&P 500 Index into fresh all-time highs. With oil at its highest level since the week-ending December 4, it seems like a good time to revisit the S&P Energy Select SPDR ETF (XLE) and Exxon Mobil Corporation (XOM).
The last time I covered these two equity markets was the week-ending February 25. At that time, crude oil was building its support base and the stock market had just reached its low for the year.
At that time, I wrote the following:
“We have a few interesting divergences developing between oil-related stocks and crude oil prices. This may mean that investors are realizing that the oil companies may have reached key value areas, and that they are finally getting a grasp on the impact of lower crude oil prices on their company’s bottom-line.”
“In these cases, you can see that the stocks or the ETF did not follow crude oil prices lower during its current sell-off. This could be a sign that buyers are coming in to support these equities or that the selling pressure is subsiding. I can’t identify a buy signal yet but the price action suggests that the XLE (S&P Energy Select Sector SPDR Fund), XOM (Exxon Mobil) and CVX (Chevron Corporation) should be on your investment radar. “
Since that time, improving fundamentals in the oil market and greater demand for risky assets have helped drive XLE and XOM to multi-month highs and into key retracement areas. These factors combined with the fact that the broad stock averages are also at all-time highs means that these two equities should be watched carefully for profit-taking and short-term weakness.
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The Exxon chart is a little more complex than the S&P 500 Index or the S&P Energy Select SPDR ETF charts. This is because of the huge divergence between these markets.
Exxon, for example, posted its 52-week low the week-ending August 28, 2015 at $66.55. The market also formed a closing price reversal bottom which can be a very powerful buy signal. If you recall at that time, China’s markets were imploding and the country had to issue a tremendous amount of stimulus to stop the stock market from crashing further. Global oil prices were also supported by China’s move.
At that time the market formed a major range between $104.76 and $66.55. The retracement zone of that range is $85.66 to $90.16. The first rally from the main bottom stopped inside that zone at $87.43 and then it began a sell-off all the way back to $71.55 the week-ending January 22. This low correlated with crude oil low in January.
This week, XOM is once again trading inside this key retracement zone. The high this week at $87.84 is slightly above the previous top at $87.42. This means momentum is the key to sustaining the rally. Buyers are going to have to continue to come in to drive this market decisively through the old top and over the Fibonacci level at $90.16 in order to keep the upside momentum going. Otherwise, we could be facing another near-term correction.
If you’re interested in protecting your profits from a sell-off then the first price you have to look at is the 50% level at $85.66. A trade under this level will be the first sign of weakness.
The next level to watch is the uptrending angle at $84.05. Taking out this angle will indicate a serious change in momentum.
Finally, the last area to watch for selling pressure is the main bottom at $81.99. Taking out this level will turn the main trend to down on the weekly chart and could trigger the start of a meaningful correction with $79.70 the first important target.
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The XLE turned the main trend to up just last week when it took out the swing top at $64.28. There was a follow-through rally to the upside but the market ran into resistance, stifling the move.
Its main range is $83.66 to $49.93. Its retracement zone is $66.80 to $70.78. This zone is a potential resistance area and could be used as an area to book profits if crude oil or the broad stock indices begin to break.
This week, the market reached a high of $66.79, just one-penny shy of the major 50% level at $66.80. This is definitely a level to watch for profit-taking.
In order to sustain the rally, the XLE had to continue to post gains over $66.80. This could create enough upside momentum to challenge the Fibonacci level at $70.78, the downtrending angle at $71.10 and the main top at $71.93.
If the rally fails at $66.80 then this will be a sign that sellers or profit-takers are coming into the market. The first downside objective this week will be $63.93. Taking out this angle will be another sign of weakness.
Finally, a trade through $59.94 will turn the main trend to down on the weekly chart, setting up the market for a potential correction to $58.36.
Conclusion
With the major stock indices at or near all-time highs and traders still concerned about the global supply glut, XLE and XOM investors may decide to take a breather from the rally and consider booking profits after a strong run. The choice for long investors at this time is to continue to press the upside, or play for a pullback into a value zone. However, at a minimum, longs should move up their stops to protect against a normal correction or a change in trend back to down.
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