The energy sector has been lagging badly this year. Are there signs a catch up move is on the way? We believe the XLE(Energy Select Sector ETF)is set up well for a healthy rally. The index, which carries a heavy weighting in Exxon Mobil and Chevron(40% combined), broke above a long term trend-line(linking February, March, April, July and August monthly highs)back in early September. The XLE has since put in three straight higher monthly lows but has retraced very little of the steep sell off from the January 2017 highs.
The XLE now has a very solid bottom in place at the November lows. A fresh rally leg off this base could travel quite far. In the near term we consider the index a low risk buy near current levels. A key hurdle will be the November high near $70.50. Once clear of this level the XLE will have plenty of room to run. On the downside, a close back below $67.00 would indicate more basing will be needed before the XLE is ready to begin a significant retracement.
In addition, some interesting XLE option color: 5,000 of the Jan 72 calls were bought in one block at $.35 when XLE was just shy of $69. Also 10,000 of the March 74 calls were bought a bit earlier at $.57 with the stock around the same spot. Buyers appear to be looking for significant upside in coming months at oil seeks to stabilize in the upper $50 per barrel territory and perhaps even breakout above $60.