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Cautious Investors May Find Hope in This Oil ETF


Energy sector investors should be looking for the next catalyst to jump-start oil stocks and ETFs.

Drawing to the close of third-quarter earnings season, energy sector investors should be looking for the next catalyst to jump-start oil stocks and ETFs such as the Energy Select Sector SPDR (XLE). The timing couldn't be better to check out that fund's chart.

Click on image to enlarge

The Energy Select Sector SPDR is one of the giants of the oil ETF spectrum, and despite a nasty tumble to start this week, the ETF is still up 28% from its October bottom. That may signal limited opportunity to some, but remember, this is one of the more volatile sector ETFs out there, and asking Energy Select to run another 13.5% back to its 52-week high before year-end isn't asking too much.

Looking at the chart, we see the ETF finally took out its 200-day line last week but bumped into stiff resistance around $74. After Monday/Tuesday broader market thrashing, it has retreated below the 200-day moving average. In the event of further downside, the 50-day line at $65 must act as support. If not, Energy Select could easily return to the mid-50s.

In terms of upside from current levels, it's not all that limited, but asking for a run over the $80 to $82 area before year-end might be a stretch. We're saying Energy Select can get there, but we're also saying holding on for $88 or $90 is greedy unless you're a long-term holder.

Energy Select's chart indicates that there is some risk to getting involved in the $68 to $70 area. That's a no man's land area on the chart, and the ETF could swing $10 in either direction from its current levels. Knowing that, it's probably best to wade into Energy Select in 100-share increments and buy on any dips to bring your cost basis down.

This chart is truly an example of not that bad, but not that great, either. And remember, ExxonMobil (XOM) and Chevron (CVX), the two largest US oil companies, account for over 32% of Energy Select's weight. So go those stocks, so goes the ETF.

Bull case: Energy stocks lead a market rally over the next six or seven weeks, and that's entirely possible. Perhaps share buybacks and dividend news from Energy Select constituents will hit the wires and drive the ETF higher.

Bear case: Riskier assets are passed on and economic news pressures oil prices.

Editor's Note: This content was originally published on by The ETF Professor.

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No positions in stocks mentioned.

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