Why are we talking about the Energy sector? It has been the worst performing S&P sector last year and the only sector with losses. Nonetheless, the S&P Energy sector (XLE) is trading at oversold levels and a technical bounce may develop over the near-to-medium term. This may have started today (2/5/20) as XLE recorded a strong rally with gains of 1.99 or +3.76%. Although we have been defensive in this sector, we will note that to be market weight the S&P Energy you would need you have a 3.87% allocation in your stock portfolio. So, what are the technical conditions for WTI Crude Oil and XLE? And what are the relative leaders within the S&P Energy sector?
WTI Crude Oil
This important commodity has fallen nearly 25% since the beginning of the year. There is key support at 50 +/- 0.5 coinciding with the May/Jul/Sep 2019 and Feb 2020 lows. A deeply oversold condition coupled with the ability to find support here can promptly lead to a technical rally to 56.5-58 (10-wk and 30-wk ma). Above these key moving averages reaffirms the start of a recovery to key secondary resistance along the low-to-mid 60s (2019/2020 highs). On the downside, below 49 opens the door for the next sell-off to the Dec 2018 reaction low of 42.36.
S&P 500 Energy Sector (XLE)
XLE has fallen to key support at 53 +/- 0.5 coinciding with the 2016 uptrend and the Aug 2019 lows. The ability to find support here may lead to a technical oversold rally toward 56-58, near-term and above this to key secondary resistance at 61-62 (2019 downtrend and Jun/Sep 2019 and Jan 2020 highs). A breakout here confirms a sustainable intermediate-term recovery. On the downside, violation of 52.5 can lead to the next decline to 49.99 (Dec 2018 lows), and below this warns of a deeper setback to 43-45 (2016 lows). The XLE relative strength vs SPX trend may be bottoming as it nears the bottom of its downtrend channel. However, it still needs to breakout above the top of its channel to confirm the start of an outperformance cycle. The strong selling price momentum trend (MACD) has fallen to the bottom of its 2019 lows. A successful test here hints of a technical bounce. SCTR is trading at 4.4 or near the bottom of its 2017, 2018, and 2019 lows. An oversold condition may trigger a technical oversold rally.
XLE Relative Rotation Graph (RRG)
It is interesting to note that despite the underperformances over the past year the RRG study shows nearly half of the S&P Energy stocks or 15 names are currently residing in the leading quadrant. These stocks are the relative leaders and will likely outperform their peers over the near-to-medium term.
APA technical – Breakout above 26 (Dec 2019) suggests APA recovery to 36.35-36.75 or the Apr 2019 high and 61.8% retracement from 2018-2019 decline. Key support is 25-26 or the 50-day and 200-day ma and the Dec 2019 breakout.
HAL technical – A potential bottom is developing in HAL as evidenced by the 2018 downtrend breakout above 22, golden cross buy signal (1/10/20) and the potential for a cup and handle bottom pattern. Trading above 25.5 confirms bottom and suggests a rally to 30-31.5 (38.2% retracement from 2018-2019 decline and 2019 highs). Key initial support is 20-21 or extension of Dec 2019 breakout.
KMI technical – KMI has broken out above its 2019 highs (20.5-20.73). This suggests a retest of its 2020 highs at 21.63, and above this to 22.5-23. The 50-day ma and 200-day ma are both rising at 20.5 and 20, respectively. This provides key supports on pullbacks.
OKE is attempting to breakout to new all-time highs above 75-76. A breakout renders a technical target to 84-86, intermediate-term. Initial support rises to 73-73.5 (Oct 2019 uptrend and 50-day ma) and then 68-69 (extension of the summer 2019 breakout and 200-day ma).