SPDR Energy ETF: Long-Term Breakdown in Market's Weakest Sector?
We've earlier cited downside in
XOP
and
HAL
. Now we're taking a step back to look at the bigger picture on the
XLE
. It isn't pretty for the bulls.
As many traders know, XLE is the market's worst-performing major sector by a wide margin. A global crude-oil glut and mediocre economic growth are hurting crude prices. Throw on top of that heavy debt loads at many companies and weak quarterly results (
XOM
and
CVX
today). You also have coronavirus reducing air travel.
Finally, the trend toward ESG investing is already giving money managers less reason to hold traditional fossil-fuel companies.
This backdrop has been taking shape on XLE's long-term chart. The fund had a violent drop in 2014 and 2015, followed by 3-4 years of consolidation. The
SPX
broke out to new major highs twice during that period (late 2016 and late 2019), but neither time did XLE follow. That's a classic sign of weak price action.
While XLE's weekly chart was neutral between 2015 and 2018, it's turned more bearish since last April by forming a series of lower highs. That's now become a descending triangle, with the potential for the earlier downward move to continue.
That could result in accelerating downside with volatility rising. Options traders may want to consider favoring longer-term vega trades. Situations like this can favor buying longer-dated out-of-the money puts.
XLE's chart at this point may have some support at the 2016 low of $50. However, when you consider the long-term nature of the breakdown apparently happening, a retest of the 2009 lows under $40 isn't out of the question.
XOP
and
HAL
. Now we're taking a step back to look at the bigger picture on the
XLE
. It isn't pretty for the bulls. As many traders know, XLE is the market's worst-performing major sector by a wide margin. A global crude-oil glut and mediocre economic growth are hurting crude prices. Throw on top of that heavy debt loads at many companies and weak quarterly results (
XOM
and
CVX
today). You also have coronavirus reducing air travel. Finally, the trend toward ESG investing is already giving money managers less reason to hold traditional fossil-fuel companies.
This backdrop has been taking shape on XLE's long-term chart. The fund had a violent drop in 2014 and 2015, followed by 3-4 years of consolidation. The
SPX
broke out to new major highs twice during that period (late 2016 and late 2019), but neither time did XLE follow. That's a classic sign of weak price action. While XLE's weekly chart was neutral between 2015 and 2018, it's turned more bearish since last April by forming a series of lower highs. That's now become a descending triangle, with the potential for the earlier downward move to continue.
That could result in accelerating downside with volatility rising. Options traders may want to consider favoring longer-term vega trades. Situations like this can favor buying longer-dated out-of-the money puts.
XLE's chart at this point may have some support at the 2016 low of $50. However, when you consider the long-term nature of the breakdown apparently happening, a retest of the 2009 lows under $40 isn't out of the question.
