What's Next For U.S. Energy Sector?
Anna Coulling | Apr 25, 2022 09:56AM ET
While energy continues to outperform on a YTD basis, the past week has seen the sector fall back along with the broader market.
There are, of course, any number of ongoing risk scenarios for this, but the event that has been singled out as causing the latest swoon is Fed Chair Jay Powell’s comments that a half percent rise in interest rates is ‘on the table’ for the May meeting.
However, given the strength of the energy sector as reflected in the Energy Select Sector SPDR Fund (NYSE:XLE), I thought this would be a good time to consider the charts from a volume price analysis perspective to see whether the sector has reached a technical pause point or whether a deeper correction is on the horizon.
And for this, we need to consider the VPA picture in the slower timeframes.
The first chart I want to consider is the daily, where we can see clearly the index climb higher.
I have drawn in some trend lines to capture the price channel and highlight how volume validates the price action. However, the markers can also help to confirm whether the trend is likely to continue higher at significant support levels and zones.
The down candle we see on the chart is the result of Powell’s comments. The markets have since continued to fall heavily. For the XLE, this has meant the price action is moving towards the volume point of control, which sits at the $76 region, a strong support level where it had paused at the time of writing.
Moving to the weekly chart: the trend higher is even more pronounced. Once again, we have substantial volume coming in at the intersection/confluence of the trend line, the volume point of control and the Camarilla pivots. Still, it will be the volume at the close that will determine whether the current pullback turns into a full-blown reversal.
Get The News You Want
But it is the monthly chart that is the most interesting from a VPA perspective, which I have annotated accordingly and is self-explanatory.
In summary, this is the current technical picture for the XLE, to which we should also add some fundamental points to see if they will influence whether the XLE breaks high and hold above that obstinate $80 level.
- First, will increasing inflation keep driving the XLE higher as the energy sector often does well in an inflationary environment and is also used as a hedge?
- Second, given the heavy weighting of oil producers in the XLE, will the proposed increase of supply in May by OPEC, along with the release of 1 million barrels a day of oil from the U.S. Strategic Reserve cap or reduce gas and energy costs, ease the inflation burden for consumers?
- Third, the lack of progress may be that traders and investors are simply on the sidelines, waiting to see whether this additional supply has the desired effect.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.