A Repeat of History Is Key to This Oil Giant’s Rally

It was a massive boon for the oil giants…

While tech stocks and the rest of the market were tanking in 2022… oil stocks like Exxon Mobil (XOM) and Chevron (CVX) were going through the roof.

By the end of last year, Exxon and Chevron had rallied 80% and 53%, respectively. However, these weren’t the only oil behemoths that enjoyed huge gains…

On December 14, we saw how the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rallied a whopping 80% from January to early June.

After a sharp reversal, it then spent the rest of 2022 grinding higher with higher lows. And recently, XOP rallied off a key level. So today we’ll see what’s coming next…

Sharp Reversals

On the chart below, you can see XOP’s massive rally up into June.

However, that rally reversed sharply when the Relative Strength Index (RSI) formed an inverse ‘V’ from overbought territory (upper grey dashed line) and then tracked steeply down…

Take a look at the chart…

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Source: eSignal

That steep fall bottomed out when the RSI formed a base around oversold territory (lower grey dashed line). From there, the first of two repeating patterns occurred…

1. The July rally coincided with the RSI tracking from oversold territory right through to overbought territory. This is where XOP peaked in late August at ‘A.’

2. Then, the RSI reversed and tracked all the way down across its channel. And XOP rolled over and started its fall.

That fall petered out and reversed when the RSI formed a ‘V’ in oversold territory (making a higher low) at ‘C.’

That pattern then repeated with XOP’s rally up to ‘B’ (a higher high). XOP then reversed from that high as the RSI inverted and tracked down from near overbought territory.

When we last looked at XOP on December 14 (red arrow), the RSI warned us that XOP again looked oversold. Yet, despite a brief bounce, XOP tracked sideways before trading slightly lower.

Take another look…

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

Source: eSignal

Soon after, two bullish technical signals sent XOP higher again…

1. The RSI began to trend higher (making higher lows), as shown by the red line.

2. XOP bounced off the support level (orange line) at the bottom of its trading channel at ‘D.’

And just recently, the RSI bullishly broke back into the upper half of its range.

So what am I looking for around here?

An Emerging Third Pattern

As you can see, XOP’s strong rally at the start of 2022 (followed by its rallies up to ‘A’ and ‘B’) coincided with the RSI tracking in the upper half of its range.

For XOP’s current rally to continue, we’ll need to see the RSI regain firm footing and remain in this upper band.

But if the RSI makes any move back down through support (green line), then that would indicate the current rally is likely over. I’ll also be watching our two moving averages (MAs)…

Right now, XOP is trading up toward the 50-day MA (blue line). If the 10-day MA (red line) breaks above the 50-day MA (and accelerates higher), then that will add further confirmation of the current uptrend.

A repeat of the previous two patterns (‘A’ and ‘B’) could then potentially set XOP to make a new higher high above ‘B.’

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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