Energy has been one of the best performers, so far this year, so MoneyShow’s Tom Aspray goes prospecting for buy candidates in this outperforming sector.

The rally, Wednesday, was impressive with advancing issues leading the decliners by almost a 3-1 margin. This has turned the A/D lines higher (see Wednesday’s column) and the McClellan oscillator has moved back above the zero line to close at +18.

Nevertheless, the broad US market needs to post further gains to confirm that the correction is really over. A strong down day would turn the short-term outlook back to neutral, so one should watch the market internals in Thursday’s session.

The overseas markets have acted well with the Hang Seng up 1.5%, but the Eurozone markets are mixed, while the US futures are lower in early trading.

So far in 2014, the SPDR Oil & Gas Exploration (XOP) is up 7.08% versus just a 1.75% gain in the Spyder Trust (SPY). The XOP has also led the iShares Nasdaq Biotechnology (IBB) by 3.5%, so far, this year.

The energy sector has not really moved in tandem with crude oil prices since 2013, but crude oil has been strong this week and looks positive technically. There are two plays in the energy sector that have a favorable risk/reward profile and should be added to your portfolio at the right price.

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Chart Analysis: The % change chart goes back to 2013 and shows during this time period that the SPDR Oil & Gas Exploration (XOP) has outperformed the Spyder Trust (SPY) by just 3%.

  • The uptrend in XOP, line a, shows that it has had a positive growth pattern since early in 2013.

  • This is much different than the growth pattern in crude oil as it dropped into negative territory last October and in early 2014.

  • Last summer, crude oil was up over 15% and while its prices are now rising, crude is up just 9.4%.

  • The growth pattern for SPY is also positive as it shows a pattern of higher highs and higher lows.

The daily chart of the SPDR Oil & Gas Exploration (XOP) shows that the recent decline has just taken it back to the support at line b.

  • This retest of the breakout level is quite common as the 20-day EMA was also tested.

  • The correction held above the monthly pivot support at $70.60 and the uptrend, line c.

  • The quarterly pivot is at $69.31 with the weekly starc- band at $66.06.

  • The daily OBV broke through its downtrend, line d, in the middle of March (see arrow).

  • The OBV is now close to making new highs and is well above its WMA, as well as the stronger support at line e.

  • The weekly OBV (not shown) is also close to new, so both OBV readings are positive.

  • The relative performance analysis (not shown) signaled that XOP was a market leader in February.

  • Once above last week’s high at $74.34, the monthly projected pivot resistance is at $75.75.

  • The quarterly projected pivot resistance is at $78.32.

NEXT PAGE: 2 Energy Picks

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Valero Energy (VLO) was recommended in January’s One High-Octane Pick as it made marginal new highs last week at $56.32.

  • The sharp correction has taken VLO back to its quarterly pivot at $51.57.

  • This was also a retest of the breakout level, line a, as well as support at line b.

  • The rising 20-day EMA is now at $50.95 and it held on the recent pullback.

  • There is further support at $50.64 with the monthly projected pivot support at $48.64.

  • The daily relative performance has dropped back to long-term support at line c and is currently below its WMA.

  • The weekly RS line (not shown) did confirm the recent highs and is above its WMA.

  • The daily OBV has dropped below its WMA after making new highs last week.

  • The weekly OBV (not shown) is holding just slightly above its WMA.

  • There is initial resistance at $53.80 to $54.50.

Laredo Petroleum Holdings, Inc. (LPI) is a $3.8 billion independent oil and gas company, which reports its earning on May 8.

  • The stock has been in a trading range in early 2014 with a high of $28.41 on February 24.

  • In early January, LPI had a low of $22.82 but only reached $23.79 during March’s correction, line g.

  • The stock has rallied back above its 20-day EMA after Monday’s drop.

  • The low on Tuesday was $25.18 with monthly projected pivot support at $23.99.

  • The daily starc+ band is at $28.49 with trend line resistance, line f, at $28.85.

  • The relative performance shows a potential bottom formation but needs a move above resistance at line h, to confirm.

  • The daily OBV has already broken through its resistance at line j consistent with an important low.

  • The weekly OBV (not shown) is positive as it is above its WMA.

What It Means: As I noted earlier, the market still needs to rally further to indicate that the recent drop in some market sectors was sector rotation and that the broad market trend is still positive.

The energy sector has been one of the best performers, so far this year, and I would look to buy both the SPDR Oil & Gas Exploration (XOP) and Laredo Petroleum Holdings, Inc. (LPI).

How to Profit: For the SPDR Oil & Gas Exploration (XOP), go 50% long at $72.91 and 50% long at $71.44, with a stop at $68.84 (risk of approx. 4.6%).

For the Laredo Petroleum Holdings, Inc. (LPI), go 50% long at $26.64 and 50% long at $25.33, with a stop at $24.49 (risk of approx. 5.7%).

Editor’s Note: The SPDR S&P Retail (XRT) was included in yesterday’s Chart’s In Play portfolio but actually the stop had been barely hit on Monday.