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The Energy Sector’s Big Rally May Soon Fade

By Michael KramerMarket OverviewMay 14, 2021 05:07AM ET
www.investing.com/analysis/the-energy-sectors-big-rally-may-soon-fade-200580050
The Energy Sector’s Big Rally May Soon Fade
By Michael Kramer   |  May 14, 2021 05:07AM ET
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This article was written exclusively for Investing.com

As measured by the Select Sector SPDR ETF XLE, energy stocks have been the hottest group in the S&P 500 this year. The ETF is up more than 35% on the year, but that significant advance seems poised for a change in direction. Suddenly, oil appears to be weakening as higher coronavirus cases rise in different parts of the world. 

The ETF has struggled to get through some challenging levels of resistance. That has resulted in options traders betting on a reversal in the sector as well. The trends suggest that the sector and oil may have peaked for the short term and is likely to see much lower prices in the weeks ahead. 

Energy Stocks To Drop?

Earlier this week, there was a considerable increase in the open interest levels for the XLE June 18 $55 puts. The number of contracts increased by more than 23,000 on May 12. When digging into the data, it showed a spread trade, with a trader buying the puts. In all, they paid about $2.60 in total for the transaction. It would indicate that the XLE is trading below $52.40 by the expiration date. The more the ETF falls, the greater the trader's profit.

At the end of the day on May 13, the XLE was already trading below $52.40, at roughly $51.90. There are indications based on the technical chart that suggests lower prices may be coming for the XLE. Recently, the ETF has failed, for the second time, to rise above a significant level of resistance at $53.50. The first time it failed at that level was in the middle of March. Currently, the ETF is approaching support at $50. A break of that support level is likely to result in the XLE falling to around $46.35, a drop of almost 10%.

XLE Daily
XLE Daily

The relative strength index has been heading lower since peaking in March with a level above 70. However, the RSI has recently made a lower high, despite the ETF making a slightly higher high. This is a negative pattern known as a bearish divergence. It is signaling that the XLE has more to fall before finding a bottom. 

Oil's Falling Too

The recent weakness in the XLE stems from the current slide in oil, which shows many of the same technical trends as the XLE—oil has struggled and has been unable to rise above $67 per barrel. Despite many of the headlines of inflationary pressure taking place across the economy, oil prices have been stuck. Additionally, the RSI on oil has been showing the same bearish trends as the XLE and would indicate that a drop back to $57 is likely. 

WTI/USD Daily
WTI/USD Daily

Clearly, the sector's strong performance calls for a pause or, at the very least, a modest pullback. While it seems entirely too early to think that the energy sector is likely to enter a prolonged or protracted decline, it is worth considering that there may be further for the sector to fall over the near term. 

The longer-term outlook will be determined by the health of the economy and its recovery from the coronavirus pandemic. If life essentially returns to normal in the months ahead, it is likely to lead to increased needs for energy and oil products. 

The Energy Sector’s Big Rally May Soon Fade
 

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The Energy Sector’s Big Rally May Soon Fade

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Comments (23)
Kevin Koeper
Kevin Koeper May 15, 2021 11:10PM ET
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Thanks for another interesting article Michael, I always look for your articles because I enjoy your insight!
Magdy Wissa
Magdy Wissa May 14, 2021 1:34PM ET
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US and most European countries announced no masks for vaccinated people, economies are opening so what are you talking about here 🙄
Biniam Abera
Biniam Abera May 14, 2021 1:31PM ET
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Natural gas will drop to nothing with in few weeks.
Hardik Patel
Hardik Patel May 14, 2021 1:09PM ET
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Garbage article from a bear
Naing Ko
Naing Ko May 14, 2021 1:01PM ET
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Naing ko
Phil Manuel
Phil Manuel May 14, 2021 1:01PM ET
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this is such garbage, covid cases are dropping and the economies are opening, there is about to be a war in the middle east etc are you stuck in 2019?
Al Smith
Al Smith May 14, 2021 12:56PM ET
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162101137562134.jpg
Actually... let me use the charts you posted... Here is crude oil versus the XLE... around 33% lower.... and its much worse for the XOP... about 75% lower
Clive Lawrence
Clive Lawrence May 14, 2021 12:41PM ET
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gm I love this
Al Smith
Al Smith May 14, 2021 12:41PM ET
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162101034534895.jpg
This is one of many examples of an energy stocks that, in comparison to the price of oil, have really not rallied at all.  they, in fact, have been left behind in the dust.
Shah Zaib Shah Zaib
Shah Zaib Shah Zaib May 14, 2021 12:38PM ET
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Apparently somebody hasemought conviction to buy 20k puts at riding to bet that oil,s near term trend is down longer Tim ,sure,wti is going beyond 100,
Anthony Armijo
Tbone May 14, 2021 12:38PM ET
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I see a triple top and a demand that will never reach prepandemic levels. Add to that every producer in the world is raising production, OPEC+ exceeding their quotas by 3 mbd. Tou funny, cup and handle. Your toast.
Shah Zaib Shah Zaib
Shah Zaib Shah Zaib May 14, 2021 12:38PM ET
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Apparently somebody hasemought conviction to buy 20k puts at riding to bet that oil,s near termtrend is down longer Tim ,sure,wti is going beyond 100
Kent Reisdorph
Kent Reisdorph May 14, 2021 12:37PM ET
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"When digging into the data, it showed a spread trade, with a trader buying the puts. In all, they paid about $2.60 in total for the transaction. It would indicate that the XLE is trading below $52.40 by the expiration date." It indicates no such thing. You have no idea what the trade strategy is here.
Emil Miclea
Emil Miclea May 14, 2021 12:35PM ET
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Look I completely disagree with you 100%. .
Shah Zaib Shah Zaib
Shah Zaib Shah Zaib May 14, 2021 12:34PM ET
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Kylo Ren
Kylo Ren May 14, 2021 12:33PM ET
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Short term maybe... longer term i love oil. Will be buying XOM calls far dated
Taska Luwenskie
Taska Luwenskie May 14, 2021 12:22PM ET
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Apparently somebody has enough conviction to buy 25k puts (at writing) to bet that oil's near term trend is down. Longer term, sure, WTI is going beyond 100.
Anthony Armijo
Tbone May 14, 2021 12:22PM ET
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Your funny
FATME sahraie
FATME sahraie May 14, 2021 9:44AM ET
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vijay misra
vijay misra May 14, 2021 9:08AM ET
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I see a double bottom and a cup and holder. IMHO this is buying opportunity. Dont look weekly move oil in a month will be at all time high with virus in control in US and peaking in India. Dont be fooled by this writer.
Anthony Armijo
Tbone May 14, 2021 9:08AM ET
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I see a triple top.
Big Bazooka
BigBazooka May 14, 2021 8:46AM ET
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You are clueless, the cashflows from the E&P companies right now are not paralleled by any other sector, and the multiples are still no where the historical highs
Big Bazooka
BigBazooka May 14, 2021 8:46AM ET
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Actually we need people like you to short the sector so we can get a beautiful short squeeze
munnu jay
munnu jay May 14, 2021 8:35AM ET
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they are about to break out of resistance, but jokes aside thanks for the opposing view
Emilios Ampatsi
Emilios Ampatsi May 14, 2021 8:29AM ET
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After 3 days skyrocket and who read this will stay out
Jim Morrison
Jim Morrison May 14, 2021 8:12AM ET
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lmao....
 
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