Yesterday’s circus in the oil market will probably lead to further declines in both crude oil and stocks, as several oil majors have violated key supports.
Crude oil’s failure to rally through first resistance, and the ensuing sharp downside reversal, has seriously weakened the outlook for the energy sector.
The Energy Select Spyder (XLE) was clearly the star performer in the first quarter of 2011, but failed to make new highs with many of the market averages in early May.
In last night’s report, Fasten Your Seatbelts, I noted that the major stock-market averages were very near critical short-term support and that they were moving in lock-step with crude oil. Later, I examined several major oil companies, all among the largest components of XLE, and they also appear to be completing significant top formations.
The completion of these tops in the energy sector will impact the S&P 500 and Dow much more than the energy-light Nasdaq-100. If we get a drop in the major averages to more important support, it will be important for another sector to step in and take over leadership. It could be the tech sector.
Chart Analysis: The daily chart of the Energy Select Spyder (XLE) shows a completed head-and-shoulders (H&S) top formation, as the neckline support (line a) was violated last week.
Exxon Mobil (XOM) may be forming a weekly double-top formation, as the recent rally failed to surpass the February highs at $88.23 (line d).