Another Sector Joins the Party

09/12/2013 10:20 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

The strong action in many key sectors this week, says MoneyShow’s Tom Aspray, does support the improvement in the technical outlook. Today he focuses on one sector that joined the party on Wednesday.

Stocks closed mixed as the sharp drop in Apple Inc. (AAPL) kept the Nasdaq 100 lower for the day. There are some signs of a loss of short term momentum, but the improvement in the technical studies, as reviewed yesterday, indicates a pullback will be well supported.

A correction will bring many stocks and ETFs back to good support where the risk on new positions can be better controlled. There are several sectors and industry groups that are starting to lead the market. Long term market leaders like health care are close to the August highs and two new stocks were added in this sector.

The material and industrial sector broke through resistance this week and the Select Sector SPDR Energy (XLE) along with the SPDR Oil & Gas Exploration ETF (XOP) broke out to the upside on Wednesday.  Therefore, new positions are recommended, as energy could lead the market like it did in the fall of 2010.

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Chart Analysis: The Select Sector SPDR Energy (XLE) closed well above the 2013 resistance at $84.05, line a, and made a new all-time high.

  • The daily starc+ band is at $85.43, with the monthly projected pivot resistance at $85.77.

  • The measured target from the chart formation, lines a and b, is in the $90-$92 area.

  • The daily relative performance broke through four month resistance, line c, in August and continues to act strong.

  • The weekly RS line (not shown) is also above its WMA and resistance.

  • The daily OBV has turned higher and is now testing its downtrend, line d.

  • The weekly OBV (not shown) did make new all time highs in August and is well above its rising WMA.

  • There is near term support at $82.50 and the 20-day EMA with the monthly pivot at $81.75.

  • There is more important support now at the August low of $79.83 with the monthly projected pivot low at $79.65.

The SPDR Oil & Gas Exploration ETF (XOP) is more diversified than XLE and also has a lower expense ratio. It also closed above the August high at $64.42.

  • The 2011 high is at $65.81, line e, with the weekly starc+ band at $67.69.

  • The relative performance shows a pattern of higher lows and is above its longer term downtrend, line g.

  • The weekly OBV broke its downtrend, line h, early in 2013.

  • The OBV now shows a solid uptrend, line i.

  • There is initial support now in the $62.50-$63 area with the monthly pivot at $62.20.

  • The rising 20-week EMA is at $61.46 with the weekly uptrend, line f, at $58.50.

  • The June 2013 low was at $55.99.

NEXT PAGE: Two New Stocks to Watch

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Ultra Petroleum Corp. (UPL) is a $3.18 billion independent oil and gas company with its primary assets in Wyoming.

  • The stock hit a high of $24.19 in late May and is now down 15.4% from these highs.

  • The daily chart shows the strong close on Wednesday.

  • There is monthly pivot resistance at $21.28 with the downtrend, line a, at $22.12.

  • The relative performance has turned up, but is still well below its WMA.

  • The weekly RS analysis (not shown) does show a more positive pattern.

  • The daily OBV surged in August, but then pulled back to the zone of support, line d.

  • The weekly OBV staged a major breakout in May, and has reached levels from 2011, when UPL was trading at $47.

  • There is good support now at $19.52 and the monthly projected pivot low at $19.74.

The long-term weekly chart of Devon Energy (DVN) shows what may be a long-term base formation in the $50.50-$52.50 area.

  • The year long resistance, line e, is now being tested.

  • A close above the year’s high at $61.80 would be very positive.

  • The 38.2% Fibonacci retracement resistance from the 2011 high at $93.56 is now at $66.98.

  • The 50% resistance is at $72.06, while the base formation has upside targets in the $73-$74 area.

  • The relative performance broke its long-term downtrend, line g, in July and is holding above its WMA.

  • A strong move above the April highs will complete the bottom formation.

  • The weekly OBV has overcome its downtrend, line h, and is holding above its WMA, which is flattening out.

  • There is first support in the $57.50-$58 area with the monthly pivot at 57.21.

What it Means: The breakout in these two ETFs means that anyone who bought them in the past two years has a profit. This has bullish implications for this sector, but upward acceleration is needed to confirm a strong new uptrend. The Select Sector SPDR Energy (XLE) typically forms a seasonal bottom in October.

Both ETFs and Devon Energy (DVN) need a slight pullback to adequately control the risk, while a more aggressive strategy is recommended for Ultra Petroleum Corp (UPL).

How to Profit: For Select Sector SPDR Energy (XLE), go 50% long at $82.84 and 50% at $82.12 with a stop at $79.27 (risk of approx. 3.9%).

For SPDR Oil & Gas Exploration ETF (XOP), go 50% long at $63.62 and 50% at $62.48 with a stop at $59.57 (risk of approx. 5.5%).

For Ultra Petroleum Corp (UPL), go 50% long at $20.52 and 50% at $20.28 with a stop at $19.37 (risk of approx. 5%).

For Devon Energy (DVN), go 50% long at $57.94 and 50% at $56.78 with a stop at $55.67 (risk of approx. 3.0%).

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