Oil Stocks Could be Due for a Comeback

Oil bulls have had a tough time of it lately.

Buying the Energy Select Sector ETF (XLE) was a great trade if you bought in around March 2020 and got out in June 2022.

During that period of time, XLE more than tripled in value. Since then, however, the action has been largely sideways.

XLE is currently trading around $79… exactly where it was in the middle of June 2022.

But all this sideways movement might soon be coming to an end, and oil bulls might have something to cheer for once again.

Check out this chart of XLE below so I can show you what I mean.

There are two important things going on with this chart.

First, we have a clear triangle pattern in the making. I’ve drawn the outlines of the pattern using the blue trendlines.

The key characteristic of a triangle pattern is sideways price action. That’s exactly what we’ve seen in XLE, as the market has traded in a $27 range for about a year.

Breaking strongly above the resistance line of the triangle would signal that the pattern is complete and XLE is ready to resume its upward march.

Second, we can see strong bullish divergence in the Relative Strength Index (RSI). The RSI is my momentum indicator of choice.

I use the RSI to assess whether market movements have real underlying strength or weakness behind them.

Divergence is one of the most powerful applications of the RSI. Bullish divergence occurs when a market is either trending lower or sideways, but the RSI is trending higher.

This is often a sign of hidden strength within the market. Investors who pay close attention to these kinds of signals know that eventually, the market will follow the RSI higher.

Let’s take another look at XLE…

The market closed at $76.97 on March 17. Almost exactly two months later on May 16, XLE closed at $76.98, putting in a perfect double bottom.

While doing so, the RSI began showing signs of bullish divergence. This typically happens right as a triangle pattern is getting ready to breakout. I highlighted the divergence on the chart using the red line.

That’s why it’s important to keep an eye on the upper resistance line of the pattern. If the market can break through this line, then we’ll likely see XLE head higher over the next several weeks.

Energy bulls will try to test the previous all-time-high in the ETF of $101, which was established all the way back in June 2014.

And as Jeff recently wrote, seasonal patterns for oil tend to be bullish this time of the year.

Happy trading,

Imre Gams

Are you ready to trade oil?

Let us know your thoughts – and any questions you have – at [email protected].