Energy ETF Diverging from Crude Oil

01/27/2011 10:21 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: In early January, crude oil was testing upper trend line resistance and there were signs that a short-tern top could be forming. Crude oil did drop sharply while the Select Sector SPDR - Energy (XLE) has stayed strong, closing at new rally highs on Wednesday on impressive volume. Has anything changed since last time?

March crude oil did close below the $88 level I mentioned last time and has dropped to test the support in the $86 area. With Wednesday’s rebound, what should we be watching now?

  • There is next resistance at $88.50 and then at $91

  • A close above $90.30 would be positive and suggest a challenge of the recent highs

  • Volume was heavy on the recent drop, which suggests that the decline may not yet be over

  • On a drop below support at $85, the next downside targets are in the $81.40-$82 area
XLE has continued to make higher highs and higher lows as its solid uptrend is clearly intact.
  • The on-balance volume (OBV) surged to a new high on Wednesday, confirming the price action

  • The uptrend in the OBV goes back to the October lows

  • Next resistance in the $72.50 area and then at $74.50-$75. Longer-term resistance is at $78

  • There is initial support now at $68.70-$69.40 with stronger support at $67.50

What It Means: Obviously, crude oil is much more volatile and has more factors governing its price action that an energy ETF based on a group of the largest energy stocks (XLE has a 18% position in Exxon Mobil (XOM) and over 12% in Chevron (CVX)). Clearly, the action in XLE sets a positive bias for the energy stocks, which should also be supportive for the stock market in general, and especially the large cap indices. Crude oil looks ready to correct further after a bounce back to first resistance.

How to Profit: On December 14, I discussed the technical pattern in XLE and thought it looked attractive for purchase in the $65.40-$65.80 area, which was hit over the next few days. In early January, I raised the stop to $66.77 and advised selling half the position at $69.76. For those who still are long XLE from $65.80 or better, raise the stop now to $68.56. I see no good new risk/reward entry point at this time in XLE.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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