The Energy Select Sector SPDR Fund ETF (XLE) is weak. Weak. Did I say weak?
Let's check out this leadership sector and see if a downside move is temporary or more serious.
In this daily bar chart of the XLE, below, I can see that prices are close to breaking down from an equilateral triangle formation. Prices have made lower highs and higher lows since October. A clear break of the early February lows could precipitate further selling.
Prices trade below the declining 50-day moving average line and the rising 200-day moving average line is not far below the market in the $83 area. The 200-day line has been tested before and survived but this time could be different.
The On-Balance-Volume (OBV) line shows weakness from November telling me that sellers of XLE are being more aggressive than buyers. The Moving Average Convergence Divergence (MACD) oscillator is hugging the zero line.
In this weekly Japanese candlestick chart of XLE, below, I see a maturing uptrend. I look at the price action in recent months being different from one or two or three years ago. In the past the XLE has rallied strongly above the rising 40-week moving average line.
In recent months the XLE has been trading much closer to the average line. This is a subtle difference and not an indicator flashing sell or buy. Think about it. Trading volume has been declining for months but the weekly OBV continues to rise. The MACD oscillator shows a pattern of a lower high and thus a bearish divergence from the price action.
In this daily Point and Figure chart of XLE, below, I can see a potential downside price target in the $77 area.
In this weekly Point and Figure chart of XLE, below, I see an upside price target but a trade at $81.44 or lower should weaken this bullish picture.
Bottom line strategy: Alan Shaw, one of my mentors, taught me and countless others to ask questions. If the XLE turns lower from here what could it do to the major averages? What is the weakness in Crude Oil Futures prices telling us about the global economy? As you ask yourself those questions, be sure to raise your sell stops on existing energy positions.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
