Energy trade requires patience after WTI Crude trend violation
- SPX trend and momentum still positive, and long bias warranted over 4200.
- Crude oil’s -4% decline on Monday could serve to break support.
- Energy would likely underperform in the short run, but likely bottoms in August.
Trend bullish- No evidence of any deterioration in SPX nor QQQ. Trends remain positive and dips should be buyable barring a break of $4200, which is near-term support
Monday’s early gains in Technology, Communication Services and Consumer Discretionary still look likely to be able to carry indices higher, despite many claiming US stock indices have gotten overbought.
A huge week of economic data awaits with CPI, FOMC meeting, ECB meeting and BOJ all set to meet this week. This very well could result in volatility if results vary substantially from expectations.
Both US Dollar and US Treasury yields have given initial indications of possibly turning lower. I’ll weigh in on these in the coming days.
With regards to SPX, any breakout above last August’s 4325 peak (2022) should help SPX lift higher to near 4380-90. With regards to support levels, it’s right to simply focus on 4200 as being support for SPX. Over 4200 warrants long exposure.
WTI Crude breakdown looks negative technically
Monday’s (6/12/23) breakdown to the lowest daily closing price of the year for generic WTI Crude oil futures likely could lead to a decline to the mid-$50’s before any recovery.
This is a bearish breakdown, and the negative break of this minor triangle pattern suggests that further losses could be in store over the next 6-8 weeks for Crude oil. Furthermore, this could likely lead to near-term underperformance for Energy.
Overall, my thoughts of WTI Crude having begun a new bull market back in March 2020 remain intact. The decline in Crude from last June likely will experience brief but potentially sharp declines down into August before rebounding and scaling higher in the back half of 2023.
At present, until/unless WTI Crude can regain last week’s intra-week highs of $75.06, it’s expected that Crude oil likely falls further as a result of Monday’s pullback.
Energy trade will require some patience
While Equal-weighted Energy has risen over 2.5% over the last month, (RSPG -0.46% ), which is the fifth best performance of the major Equal-weighted Sector ETF’s by Invesco, the Sector SPDR Energy ETF (XLE -0.92% ) has been higher by just +1.33%.
Last week I discussed how the Exploration and Production ETF (XOP) had broken out of downtrends from last Fall, however the bulk of Energy ETF’s have not yet achieved this move.
Charts below show the Equal-weighted Energy ETF, RSPG -0.46% , in relative terms to the Equal-weighted S&P 500 (RSP 0.04% ). As shown below, this has not yet indicated that a period of outperformance is imminent.
Rallies back over May highs in this ratio (RSPG vs. RSP) would give the first indication of potential strength in Energy.
Until then, it’s necessary to be selective in this sector, and it’s thought that Crude’s decline Monday likely brings about further weakness in Energy stocks as a sector in the short run.
My Energy cycle composite had pinpointed a possible August 2023 bottom for WTI Crude. Monday’s (6/12/23) decline likely means that buying dips in Energy could be premature.
Specifically, XLE requires a move back over $84 to expect a rally back to new highs for 2023. Important support on declines lies at $76.25. For OIH -0.06% , resistance lies at $281.64, then $300. Until $300 is surpassed, OIH very well might experience weakness down to $246.
This level remains important support to hold on declines. Any weakness under $246 would make OIH -0.06% quite vulnerable as this might also violate the lengthy uptrend from October 2020 lows, connecting last Summer’s lows at $198.59 (Not shown).
The chart below highlights the ratio of Equal-weighted Energy to Equal-weighted S&P 500 which has been trending down since last Summer 2022. A breakout of this “green” line will be necessary before expecting Energy’s rebound could be getting underway.
Marathon Petroleum (MPC -0.56% ) cannot afford to break May lows
MPC -0.56% was an Energy name added to my technical long list (UPTICKS), but the decline in WTI Crude has caused deterioration in this name over the last month.
May’s pullback violated near-term support at $120 very quickly, but prices have stabilized near important intermediate-term trendline support at $104.
Overall, I see MPC as an attractive risk/reward at current levels. However, if a further decline in Energy causes this sector to pullback more sharply in the next couple months, it’s important for MPC to hold its uptrend at $104.
Bottom line, trends have stabilized in the short run, and uptrends have not been violated. However, I’ll set support at $104, and will continue to hold MPC in my list provided this level holds.
