A Dual Timeframe Look at Leading ETF Energy XLE

Dec 5, 2010: 11:13 AM CST

I recently posted a Sector Rotation update wherein the strongest Sector off the September market bottom was Energy – as shown by the 25% gain in three months from the energy sector.

Let’s now step deeper to look at the weekly then daily structure of XLE and note key levels to watch – along with a lesson in breakouts from resistance.

First, the XLE Weekly Chart:

Cutting through all the noise, the key point here recently was the price break above the weekly $62 level.

Not only was it the April high (similar to that of the broader stock market), but it was also the 50% Fibonacci Retracement level (exactly $62) as drawn from the 2008 high to the 2009 low.

A price breakout firmly above the 50% Retracement Line often argues for a play up to the 61.8% line as a next potential target – which rests at the $68 level.

This week was a powerful move for energy in general, with the ETF (XLE) up 5% in a single week – such moves can happen after a market breaks key resistance.

In many cases, the ‘psychology’ of price changes as in, short-sellers BUY to cover and then sidelined bulls BUY because they fear they’re missing a breakout, and others who are already long BUY, adding to existing positions.

That’s the theory of Positive Feedback Loops at least.

I’m also showing little divergences in the past that occurred at intermediate or major turning points in the fund’s price.

So the weekly chart so far shows a potentially clear path to the $68 level, but what does the daily chart show?

The daily chart takes a closer look at the power of breakouts – namely the initial breakout in early November (notice the single-day gain) on the break above the $61 price level.

Price pushed up to the $64 level (I’ll discuss why this is important shortly) and then pulled back to support at the 20 day EMA before breaking out AGAIN this week to new recovery highs – which is what called our attention here in the first place.

Given that there is no further daily resistance levels to watch, we turn to the weekly chart to play the “Will Resistance Hold” at $68?” and if not, then the bullish pathway is clear for higher prices above $68.

The $64 level was initially important as it was an Inverse Head and Shoulders Price Pattern Projection Target as drawn (dotted vertical line).

Take the distance from the neckline (at $56) to the end of the head (July low just above $48) which is $8, and then ADD that distance to the neckline price of $56 to arrive at an upwards price projection target of $64.

Notice the initial pullback at the target, but buyers have now gained the upper hand again and are pushing up to higher levels in breakout mode.

Continue watching not only this ETF, but the components within it (source Yahoo), with the largest percentages of the fund being Exxon-Mobil (XOM), Chevron (CVX), Schlumberger (SLB), ConocoPhillips (COP), and so on.

That’s a good way to get ideas for stocks – start with a ‘thesis’ on the market, look to which sectors are outperforming others, and then look within those sectors to leading fundamental and technical (rising trend) stocks within leading sectors.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

1 Comment

One Response to “A Dual Timeframe Look at Leading ETF Energy XLE”

  1. Virtual Crowds Says:

    The wrapper matters…

    I found your post interesting so I’ve added a Trackback to it on my blog. Hope that’s OK? :)…