The near-term US Equity market index trends remain bearish, and S&P’s failure to recoup 4250 on a close keeps prices trending lower and offers an above-average likelihood of an upcoming test and possible temporary break of February lows. The volatility most are witnessing is reminiscent of 2008 and it’s important to remember that after a 135-point range on Tuesday, it’s not where prices are trading intra-day, but where they finish. SPX has now been lower for the last four trading sessions and closed Tuesday at the lowest levels since last June, albeit still above February intra-day lows. Meanwhile, this remains an excellent stock pickers environment for those with Energy, Utilities, Agriculture, Metals exposure. As discussed, trends are bearish under 4250 and bullish above, but are expected to test 4114, and under should lead to 4000.
Short-term & Intermediate-term Technical Thoughts on XLE, OIH
Before delving into Clean energy, It’s right to revisits thoughts on the technical attractiveness of the main fossil fuel related Energy ETF’s which have skyrocketed following the Russian invasion and subsequent US banning of Russian Oil imports, announced today, Tuesday 3/8.
Many of the Energy related ETF’s have experienced monstrous gains in recent weeks. It’s no surprise that many might have avoided buying into this group following such a banner year in 2021 when Energy outperformed dramatically. Yet the recent acceleration higher combined with the geopolitical tension has caused many to revisit their thinking on Energy, wondering if there’s still money to be made, and whether prices can truly remain overbought when WTI Crude is showing massive backwardation in futures.
Overall, on an intermediate-term basis, I agree wholeheartedly with our own Head of Research and Managing Partner Tom Lee on having a long-term bullish bet on Energy. My intermediate-term technical thoughts show robust trends at work, with prices having broken out of long—term downtrends from 2014 and my intermediate-term cycle for WTI Crude shows a bullish bias into Summer 2023. I discussed Energy being one of my four top sectors for the year back in January during my 2022 Outlook presentation.
As seen in XLE daily chart going back eight years below, prices accelerated right after this long-term downtrend was severed back in January 2022. Now XLE trades at 37% over its rising 200-day moving average, more stretched than 2014, or 2008. Commonly utilized momentum indicators like RSI (Relative strength index) are now back to overbought levels.
However, this remains a very strong underlying trend, and despite being overbought, it remains right to have some intermediate-term long exposure to this group. (As can be seen, crossing the 200-day moving average (m.a.) back in 2020 did provide an excellent entry into XLE. However, using these breakouts for buying and/or selling have proven difficult over the years, and I generally don’t recommend it.)
Overall, how one manages a position that’s achieved tremendous profits in record time depends completely on one’s own risk management process, tolerance for risk and time-frame for investment. Initially though when considering long-term charts on Energy ETF’s, this is a group that is demonstrating exceptional leadership and has given investors little to no reason to doubt its longevity, with no real evidence of any technical deterioration or slowing of trend whatsoever.
However, Short-term, many Energy ETFs are now up to important levels now
The prior chart showcased the SPDR Select Energy ETF XLE 0.99% , but I’ll now show the OIH, the VanEck Vectors Oil Services ETF. OIH, of course, has outsized holdings of stocks like SLB 0.67% and HAL 0.59% , which together make up over 30% of OIH. Many investors were aware of OIH’s underperformance last year, but lately we’ve seen prices recover and make up ground in a big way. Just in the last two weeks, OIH has gained over 20% in price based on 3/8’s close of 291.18 (This actually rose to intra-day levels of 316, making this greater than 27%)
Technically, momentum is now overbought on daily and weekly basis, while price has pushed up to levels of resistance based on a trend drawn from intra-month peaks in June 2020, nearly two years ago. Overall, I feel OIH likely should encounter some resistance at 304-307 near Tuesday’s highs. Yet support lies near 250 on pullbacks and should afford attractive buying opportunities. Keep in mind that despite WTI Crude trading at the highest levels since 2008, OIH and XLE remain under 2014 peaks.
I don’t feel its incorrect for those with short-term time frames for investment, or a larger than normal size position to consider trimming Energy ETF’s over the next month ahead of WTI Crude entering its normal seasonal time of weakness. My technical resistance does show important levels near-term at 304-7 for OIH. However, given the current geopolitical tension, one simply cannot rule out additional strength. Therefore, I feel strongly that having an intermediate-term long position in OIH and XLE along with XOP makes good sense given the current geopolitical environment and Technicals support this view 100%. Long-term upside resistance for OIH lies near 430.
Bottom line, Energy remains quite positive technically, and still attractive on an intermediate-term basis to have as part of one’s portfolio in 2022. However, how one wishes to treat short-term gains is completely up to each investor based on their own individual risk profile. Taking half of these recent gains “off the table” and taking profits might make sense for some given evidence of being stretched and/or up against resistance.
Moreover, for those that choose this route, I would encourage buying dips if/when one gets the chance to do so. For XLE that area lies at $63-$66, and it should be mentioned that XLE has two former trading highs from 2016 and 2018 which might cause some resistance to this move. Intermediate-term targets lie at 101 and then $115.
Clean Energy goes “Green” Don’t look now, but many parts of renewable energy which have been sub-par investments in the last year are finally beginning to turn higher. I’ll steer clear of offering fundamental reasons for this sudden upshift, but simply rely on technicals to tell the story. Looking at daily charts of the Ishares S&P Global Clean Energy ETF, (ICLN 0.69% ) this just broke back above prior lows from last year after its successful breakout of its downtrend.
Looking back, ICLN bottomed at nearly exactly a 50% absolute retracement of the all-time highs. Thus, there were reasons “why” this bottomed when it did, and now structurally the breakout this week has caused momentum to start to trend positively again. Thus, owning and/or buying ICLN looks right here technically, as this entire group had underperformed for some time and has just now come back in a mean reversion type manner.
Stocks like SEDG 8.26% and ENPH 3.52% are part of this ETF, as well as smaller names like PLUG 1.07% , and a few Utilities like XEL 0.70% and NEE 2.91% .
The Solar ETF (TAN) from Invesco, also looks attractive to buy for gains in the days/weeks to come
This ETF has a few similar but also different holdings than ICLN, but has made similar progress in pushing higher above former lows from mid-2021. TAN as of 3/4/22 had a 11% weighting in SEDG 8.26% , 8.97% in ENPH 3.52% , 8.5% in Xinyi Solar, and 7% in FSLR 5.34% . Upside targets for TAN lie at $83 initially and then strong resistance near $91 which represents a 50% retracement of the high to low range from early last year along with representing strong trendline resistance. This looks appealing to buy at current levels technically after this breakout above late February 2022 highs, and I’m looking for upside follow-through in the weeks to come.
