A couple of weeks ago, we checked out the Energy Select Sector SPDR Fund (XLE)…
Despite production cuts from OPEC+ and China’s emergence from COVID, XLE has been under pressure all year.
That’s because the markets are increasingly worried that the global economy could go into a recession in the second half of this year.
When we looked at XLE on May 4 (red triangle in the chart below), XLE’s downtrend was accelerating. Momentum continued to decline…
As I wrote at the time, XLE would soon test a key level unless we saw that momentum reverse.
So now, with that level about to come into play, I want to see what’s in store for this highly watched commodity…
On the chart below, you can see how volatile XLE has been this past year…
The short-term 10-day Moving Average (MA, red line) has crossed the longer-term 50-day MA (blue line) nine times since June. That’s a huge number of swings for that time period.
Yet, despite all the action, XLE is trading right where it was 12 months ago…
Energy Select Sector SPDR Fund (XLE)
As the chart shows, these dramatic swings in XLE correspond to huge changes in momentum…
Just look at the rise from July to August. The Relative Strength Index (RSI) rallied all the way from oversold (lower grey dashed line) to overbought territory (upper grey dashed line).
And that pattern repeated in the September to November rally.
The chart also shows how XLE reversed from its peaks in June, late August, and November with the opposite pattern. The RSI reversed from overbought to oversold territory.
However, the pattern evolving since that main peak in November (‘1’) has caught my eye…
As you can see, XLE has made a series of lower highs since then (‘2’ and ‘3’) with the 50-day MA trending lower.
Take another look:
Energy Select Sector SPDR Fund (XLE)
Adding to the bearish sentiment, you can also see that this downtrend has been marked by lower lows.
That’s why the action around XLE’s down leg from its recent peak at ‘3’ is crucial to where XLE heads from here…
So, what am I expecting?
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Must Hold Support
As you can see, XLE is fast closing in on short-term support (orange line). And what happens around this level will be key…
For XLE’s downtrend to end, XLE must hold support. That’s the level that XLE tested, held, and (eventually) rallied off in March.
If XLE crashes straight through that support level, then XLE’s downtrend has further to play out. That would see XLE next making a new lower low.
That’s why I’m watching the RSI closely right now…
As you can see, in March, the RSI bounced off oversold territory (red circle). That change in momentum enabled XLE to turn around and rally higher.
If the RSI repeats that pattern over the coming week, then that will show evidence that XLE’s downtrend is coming to an end.
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