The energy sector has been out of favor with investors for the last year and a half, and the declines in oil prices and energy stocks have deepened in recent weeks. But I think it is time to step in and buy the sector.
It isn’t a move for anyone that gets nervous and closes down a trade before giving it a chance to work, but what I see on the charts makes me believe there is money to be made in the energy sector in the next year.
Using the Energy Select Sector SPDR ETF (NYSEArca: XLE) as a proxy for the sector, there were several items on the charts that formed my bullish opinion. First, let’s look at the daily chart.
What jumped out at me on this chart was how the ETF had just carried out a head-and-shoulders pattern, with the blue circles representing the various parts of the pattern. Now that the head and shoulders pattern is complete, it shouldn’t impede the stock as it attempts to move higher. The $65 area that served as the neckline and could provide a little resistance on the way up, but there are other factors that should outweigh that resistance.
We also see that the XLE is oversold based on both the RSI and the slow stochastic readings. We saw both of them in oversold territory last October as well and the stock rallied approximately 14% over the next few weeks. I think we could see a similar move this time around, but that is only the short-term view. There is more room to move up based on the longer-term charts.
Energy Sector Reversal at Hand
There wasn’t much on the weekly chart that really garnered my attention, but there was the recent series of three higher lows which should signify that a reversal is at hand.
The monthly chart was the most useful of the three charts in terms of forming my bullish opinion. The XLE has been dancing around its 120-month moving average over the last five months and that is something that hasn’t happened since the end of the financial crisis in late 2008 and early 2009.
Could XLE Double?
If we look at the oscillators and what they were doing seven years ago, we see similar patterns in them now. The 10-month RSI was in oversold territory for the first time since the ETF was launched and the stochastic readings were in oversold territory for only the second time. All of this was going on as the 120-month moving average was acting as support.
We look at what is going on now and we see the 120-month moving average acting as support again and we see the 10-month RSI was in oversold territory for the second time and the stochastic readings were there for the third time. The RSI is now out of oversold territory and the stochastic readings have made a bullish crossover.
Looking at what the XLE did the last time it used the 120-month as support and it came out of oversold territory on the monthly chart, we see that the ETF doubled in two years and nearly tripled in five years.
I see a similar move in this instance. I would look to buy the XLE at this time and you can play the short-term bounce which should net you over 10% in the next few weeks – or you can hold it long term and shoot for a doubling of your money.
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