ENERGY CONTINUES TO LAG S&P 500 - BOLLINGER BANDS CONTRACT IN XLE - OIH SHOWS RELATIVE WEAKNESS - OIL TESTS SUPPORT FROM BROKEN RESISTANCE - A DISCONNECT WITH THE NATURAL GAS ETFS
ENERGY CONTINUES TO LAG THE S&P 500... Note: There will be another posting with a video later today. November was not a good month for the Energy SPDR (XLE). Chart 1 shows the Sector SPDR Perfchart with the absolute performance for the nine sectors and the S&P 500. The blue dotted line marks the 6.36% gain in the S&P 500 since November 2nd. Six of the nine sectors are outperforming the S&P 500. Materials, healthcare, industrials and utilities are the leaders. Three are underperforming the S&P 500: energy, consumer staples and finance. With healthcare and utilities on the leader board this month, it appears that the market has taken a more defensive stance. Also notice that technology (green) is barely outperforming the S&P 500.
Chart 1
QUIET TRADING IN XLE... While the S&P 500 moved to a new high in November, chart 2 shows the Energy SPDR (XLE) failing to exceed its October high and showing relative weakness. Despite underperformance, XLE has yet to fully reverse the overall uptrend. After a surge to 60 in mid October, the ETF settled into a trading range that narrowed over the last four weeks. Notice that the Bollinger Bands are at their narrowest in over five months (gray lines). Contracting volatility translated into a triangle on the price chart. I am watching support at 56 and resistance at 58.4 for the next directional clue. The indicator window shows RSI at its make-or-break level. This momentum indicator held support in the 43-50 zone from August to December, which coincided with an uptrend in XLE. A break below these lows would be negative for momentum - and XLE.
Chart 2
The Oil Service HOLDRs (OIH) appears to be weaker than XLE. Chart 3 shows OIH breaking flag/wedge support with a sharp three-day decline in mid November. The ETF has since stalled around 120, but has yet to recover this support break. A move back above 121.5 is needed to break short-term resistance and revive the bulls. Barring such a breakout, the next support zone resides around 107-110. The indicator window shows OIH with West Texas Intermediate. Notice that these two have been moving lower since mid October. OIH is likely to remain under pressure until oil reverses its six week slide.
Chart 3
OIL BATTLES SUPPORT... West Texas Intermediate ($WTIC) has been trending lower the last six weeks, but support from broken resistance is near and the pattern looks like a falling flag. Going back to early July, chart 4 shows oil surging above 70 and then correcting with a falling channel that lasted around 6 weeks. $WTIC reversed the fall with a breakout around 72 and the rally extended above 80. After becoming overbought above 80, oil consolidated its gains with a falling flag, which is a bullish correction pattern. Also notice that there is support from broken resistance around 75. Technically, the trend is down as long as the flag falls. Look for a break above flag resistance to signal another continuation higher. OIH sometimes leads oil so an upside breakout in OIH would be positive for oil.
Chart 4
The indicator window in chart 4 shows oil with the S&P 500 and the Dollar. In general, the Dollar is trending lower as the S&P 500 and oil trend higher. The positive correlation between the Dollar and stocks is more pronounced than between the Dollar and oil. Notice that oil and the Dollar declined from late August to late September and again from late October to early December. While a week Dollar is generally bullish for commodities, oil seems to be less affected. Chart 5 shows the US Oil Fund ETF (USO) for reference. In contrast to the iPath Natural Gas ETF ($GAZ) and US Natural Gas ETF (UNG), USO tracks its underlying commodity pretty well.
Chart 5
Chart 6
