ChartWatch: Energy Stocks Should Stabilize

Energy stocks took a pounding, as crude oil prices collapsed from $105 to $91 in May. How much of a pounding? Well, the Energy Select Sector SPDR (NYSE: XLE) – an ETF that closely tracks energy stocks – is down 12% to $64 so far this month. Although the decline has been rapid and fierce, there is reason to believe XLE shareholders have seen the worst.

A quick look at the chart below reveals that XLE is less than 2% above a strong support zone (blue line in chart) near $63 that proved to be sturdy in August, September, November and December. The history of accumulation activity at $63 suggests that XLE will soon stabilize or potentially bottom.

Traders can position themselves for a bullish turn over the next few weeks as XLE stabilizes. Over the long-term oil prices are bound to increase as supply cannot meet up with demand. Investors can take a position in United States Oil fund (NYSE: USO), which is an ETF that tracks crude oil.

 It is difficult to determine if XLE already made its low during the pullback, but this is not time to be bearish. The support at $63 is strong and unlikely to be broken over the next few weeks. Look for a reversal pattern first before taking a new long position with an initial target 10% higher to resistance near $69.

Equities mentioned in this article: XLE, USO