After rallying nearly 80% since January, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) lost 36% of its value in just one month.
Its fortune quickly reversed after peaking in early June.
But when we last looked at XOP on July 26 (red arrow on the chart below), it had formed a short-term base and was showing signs of an emerging rally…
And that move higher led XOP to test a key technical level.
Today, we’ll see how that move panned out and discuss what we can expect from here.
Check out XOP’s chart…
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Source: eSignal
As you can see, the Relative Strength Index (RSI) stayed in the upper half of its band (above green line) throughout most of XOP’s rally.
However, in June the RSI formed an inverse ‘V’ from overbought territory (upper grey dashed line) and reversed sharply lower.
As the RSI crossed down through support and into the lower half of its range, XOP’s share price fell strongly too.
This move led the 10-day moving average (MA – red line) to bearishly cross down over the 50-day MA (blue line) – its first significant cross since early January.
Then, the RSI bounced along oversold territory (lower grey dashed line) from mid-June to mid-July before moving higher. And this enabled XOP to form short-term support from which its current rally began.
On July 26, the RSI was testing resistance (green line). For XOP’s up move to gain further traction, the RSI needed to remain in the upper half of its range.
Any prolonged move beyond that would then depend on the 10-day MA crossing back above the 50-day MA.
Although the two MAs were far apart at the time, you can see that right now they’re on the verge of crossing.
So, what can we expect from here?
Let’s take another look at the chart…
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Source: eSignal
You can see that XOP has recently broken above its long-term 50-day MA.
For this rally to take hold, the 10-day MA needs to cross above the 50-day MA and accelerate higher.
Such a move could soon see XOP test the $150 level and set us up for a potential long trade.
But remember, buying momentum is the catalyst for any rally. Meaning, we’ll need to keep a close watch on the RSI.
After breaking back into the upper half of its range, the RSI retested support in early August.
While it tracked slightly below support on August 4, that support ultimately held with the RSI recently tracking higher.
On top of the 10-day MA accelerating above the 50-day MA, it’s crucial for the RSI to remain in this upper band for XOP to sustain its emerging rally.
However, just a word of caution… you can see that with this recent move, the RSI could soon be approaching overbought territory.
Any strong reversal out of this area would likely mean a pullback is in the cards.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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