China coming out of tight COVID restrictions… OPEC+ cutting production… You might expect the price of oil to be going through the roof.

But despite a promising start to 2023, the Energy Select Sector SPDR Fund (XLE) has been going backwards.

The reason behind this is twofold…

One, traders fear that a slowing U.S. – and global – economy will see oil demand fall. And two, restrictions on Russian oil exports have proven tough to enforce.

Against this backdrop, XLE has dropped 15% from its January highs.

So, with oil likely to remain volatile, I want to see how things might play out from here…

Shifting Momentum

On the chart below, you can see where XLE peaked in June 2022 (‘A’).

While much of the rest of the market sank and struggled, XLE had seen a massive 68% rally from the start of that year to that point… until a massive reversal in momentum sent it spiralling down…

The Relative Strength Index (RSI) made an inverse ‘V’ from overbought territory (upper gray dashed line) and fell straight down through support (green line)…

Energy Select Sector SPDR Fund (XLE)

Image

Source: eSignal

Since then, XLE’s direction has traded off big shifts in momentum…

That includes when XLE rallied in July, September, and, most recently, March this year. The RSI rallied off oversold territory (lower gray dashed line)…

The RSI also reversed and moved lower alongside a series of peaks and pullbacks in August, November, and January.

But today, I want to focus on the recent associated price action against these RSI moves.

XLE made a series of lower highs at ‘2’ and ‘3’ after its reversal from the November (‘1’) peak.

These moves coincided with two bearish technical signals…

  1. The RSI ran out of momentum and reversed from each peak at a lower level — meaning each move further exhausted buying momentum.

  2. The longer-term 50-day moving average (MA, blue line) has been gradually trending down all year up to this point.

Even when XLE gapped higher in late March off the back of the OPEC+ cuts, the price action couldn’t follow through.

After that initial jump, XLE could barely rally a single dollar over a two-week period before it would roll over and move lower.

Now, the RSI has fallen through support and begun to track in the lower half of its band (red circle), accelerating that down move.

So, what am I expecting from here?

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Unlikely Recovery

XLE has been particularly sensitive to swings in momentum over the past 12 months…

Now that the RSI has broken into its lower range, it will be a tough for XLE to recover without a major reversal in momentum (rising RSI).

The longer the RSI stays in its lower range… the bigger this emerging down move might be. The next test would be XLE taking out its March low.

I’m also watching the 10- and 50-day MAs.

As you can see, the 10-day MA (red line) is closing in on the 50-day MA.

Should the 10-day MA cross below the 50-day MA and both trend down, it will add further weight to any down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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