Chart Of The Day: Energy Sector Likely To Fall Along With Oil

By Pinchas Cohen

In yesterday’s article, we discussed market breadth. Today, we will post the first piece in a series on the sectors of the S&P 500 Index.

While yesterday’s post pointed to internal weakness within the benchmark index and the potential for it to decline, specific sectors could buck the trend, or alternatively, lead the trend. So it pays to get acquainted with the sectors, be it to park your capital in the sector with the best trajectory, or to trade on the moves.

Of the 10 sectors, the one that's in an obvious downtrend — bucking the overall uptrend of the rest of the market — is energy.

While the energy sector (via Energy Select Sector SPDR (NYSE:XLE)) enjoyed an uptrend that started in February 2016, along with its benchmark commodity, it ended on February 2017, when oil began a decline. Since, then crude has been trading within a falling channel.

XLE Daily Chart

The recent rise in the price of WTI to its highest in a month, in what was a return-move to retest its channel-top since February, led the entire sector to its highest price in a month. As well, just as the price of crude is returning to its channel top, the price of the sub-index has reached the top of its falling channel. While fundamentally the price of oil is likely to be dominated by the effect of hurricanes on supply and demand, particularly with regard to offline refineries and panicked consumers stocking up on gasoline, technically, the price is expected to end its correction and resume its downtrend.

Trading Strategies

Conservative traders may wait on a short for a confirmation of supply at the channel-top with a lower close. The more of yesterday’s gain that is erased, the better the confirmation. On the other hand, the confirmation has a price. Not only will it eat away from expected profits, but it will create a worse risk-reward ratio, with the bigger potential pullback to the resistance of the channel-top. The confirmation reduces the risk of an upside breakout, while also reducing the potential profits should the move pan out as well as a worse risk-reward ratio.

Moderate traders would wait on a short for a confirmation with a close that didn’t break out of the channel-top.

Aggressive traders would short now, placing a stop-loss at least above yesterday’s 65.150 high, or above the 65.66, 100 dma (blue) that guards the integrity of the down-channel and as far as above the previous, July 28, 67.125 peak. However, if a trader were to assume such a risk, the trader should allow the position to remain open for a gain at least equivalent to the risk and cost of trade and preferably allow a gain of three times the risk in order to cover losses from previous trades. That would mean riding the trade down to the bottom of the channel.