When we started the year, energy was one of the best performing sectors until June when the relative performance between the SPDR Select Energy ETF (ARCA:XLE) peaked against the S&P 500. Meanwhile, Technology has been a solid sector for the bulk of 2014; tech hasn’t shot the lights out but it’s stayed steady as a top four sector performer YTD. After the multi-month downturn in oil prices, are we seeing a possible shift out of tech and back into energy?
The following chart shows the ratio between XLE and the SPDR Technology ETF (SPDR Select Sector - Technology (NYSE:XLK)).When the price movement rises we know that XLE is outperforming XLK, whether it’s rising more or falling less. Back in June the ratio between these two sectors put in a false break of the prior high from May. This created a shift in relative performance favoring technology for the next five months.
At the start of November we had another false break, this time it was a false break of a prior low. While Energy trailed Technology, it began to improve at the start of the month. This also happened while a bullish divergence was setting up in the Relative Strength Index (RSI), as show in the top panel of the chart. However, when making a second run at the prior high in the RSI indicator but momentum was unable to break above, creating a more defined level of resistance.
Going forward I’ll be watching to see if the movement out of the ratio between XLE and XLK can push above its falling trend line while also getting momentum to break above its own level of resistance. This could lead to a shift favoring energy while technology takes a backseat. If energy bulls are unable to create a bullish setup with the trend line and resistance breaks, then we may see the ratio fall back below its October/November lows as the market continues to favor Tech.
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