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Energy Stocks Sector and XLE ETF Watch

Companies / Oil Companies Apr 19, 2010 - 12:05 PM GMT

By: Mike_Paulenoff

Companies

Best Financial Markets Analysis ArticleToday we're going to discuss the energy sector. It has lagged the overall market, but it's poised to move higher based on recent technical action and Friday's close as well as geopolitics that could impact the oil industry.


After signing the new Nuclear START Treaty with Russia last week, in which Iran was the central topic of discussion, President Obama in the early part of next week is expected to urge the allies to continue pressing Iran and North Korea to abandon their nuclear programs and to seek tougher sanctions on Tehran. The tension surrounding potential Iran sanctions can, and most probably will, impact the price of oil.

Looking at the technicals, crude oil prices have gone up about 80-85% since the low in Feb 2009. A series of higher lows and higher highs took it into Oct 2009, going from under $50 to $85 a barrel, nearly doubling in price, before going sideways. In this sideways consolidation period after October (remaining between $70 and $85), crude oil was able to digest the prior gains, before turning up again in Feb in what appears to be a new upleg after the digestion period.

As long as crude oil consolidates between $87 and $82, the next likely move in crude oil will be up towards the $90 area, then possibly $100 if there’s some kind of geopolitical event.

The XLE

The Energy Select Sector SPDR (XLE) also has a series of higher-lows and higher-highs in an uptrend, then a sideways channel from Oct to now that looks like it's about break out at around 60.50-.80. If that happens, we can expect the XLE to take off. If it goes to the top of the channel, which has been very well defined, it's conceivable that it's headed as high as the 68-69 level up from its current position of 59, or 15%, which is a good reason to keep the XLE on the radar screen.

Comparing the XLE to the S&P 500, the XLE is still attempting to break above its prior high, while the S&P 500 has already broken above its prior high of 1148. It’s now at 1194, which is almost 4% above it prior high.

Now we’ll look at the components of the XLE, starting with integrated components.

Energy Stocks to Watch

Exxon Mobil Corp (XOM), which is the biggest component of the XLE, is in a minor up-trend off the Feb low. However, it is lagging the overall index and could be called a relatively weak component of the XLE. It’s now approaching its 200-day exponential moving average, while the XLE and crude oil are well above their 200-day. Exxon’s 20-day moving average just crossed above the 50-day, a very important near-term technical sign because it indicates that it's in a turn, but first it will have to get above the top of its channel at 69-69 1/4, then it should be off to the races.

Where can it go? Exxon should be able to go considerably higher into the gap area left behind on its way down in Dec anywhere between 71 1/2 and 72.80.

Chevron Corp. (CVX) is a completely different picture than Exxon, much more bullish, much more constructive, a much more powerful chart. It is now climbing towards its prior rally peak after a pullback. It doesn't look like either crude oil or Exxon, but has its own particular profile. The 20 EMA is above the 50, which is above the 200. The 20 and 50 have turned up and now the 200 is turning up as well. From looking at the channel it appears it will test the 80-81 1/2 very soon and if it breaks out of that it will go to 85-86, possibly higher. This is a very constructive chart especially in comparison to Exxon Mobil. We would probably want to be more involved in CVX, although both are headed higher.

ConocoPhillips (COP) is much more bullish than either of the previous two charts. It’s in an uptrend, it went sideways between Oct and last week, but late last week it broke out and looks like it has considerably higher to move as well. The top of the channel for COP is at 60 and it’s currently at 55.30, which is a 20% upmove.

So, in terms of the integrated oil companies in order of bullishness or attractiveness, there’s COP, CVX, and XOM.

Now let's look at some non-integrated components, the oil and gas producers.

Devon Energy Corp (DVN) doesn't look like any of the components discussed so far. It is a badly lagging chart compared to the overall index. However, it does have a very impressive overall pattern of higher-lows and higher-highs since the Feb-Mar 2009 low. The chart shows an uptrend followed by a correction followed by what? Right now it's battling its averages, the convergence of its 20-, 50- and even its 200-day moving averages. The next potential up-move is at around 72 from Friday’s closing at 66-67. If it does move to 72 then there is a real potential for it to move even higher.

XTO Energy Inc. (XTO) is much better than DVN with higher-lows and higher-highs going back to 2009. If it runs to the top of the channel it has a whole lot higher to go. It's about to challenge its prior high at 49.10 from Dec 14. Should it take that out, it will be header up towards a higher target. The moving averages are pointed higher, and the consolidation of last week and pop off its 20- 50-day combination is very powerful. It looks like XTO has considerably higher to go.

Apache Corp. (APA) is natural gas and oil, and exhibits a much more powerful chart than a few of the others. It looks very much like the XLE, and is about to challenge and more than likely break out above key resistance between 107.50 and 109. Should that happen APA is going a lot higher and could accelerate towards the 120-22 level, or 10-11%. It also looks like a powerful chart and one we need to keep on our radar screen for next week.

This energy sector seemed poised to move higher. It has lagged behind the S&P 500, but there is usually a rotation going on and the Street is looking for the next candidate to go higher in that rotation and energy could be it.

Keep these charts on your radar screen this week as we will be discussing them during the week.

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By Mike Paulenoff

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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