The WTI uncivil oil futures contract has posted the highest high since the fourth place of 2014, underpinned by strong world demand and rising geopolitical upsets. Major energy funds have risen in tandem but are underperforming the underlying commodity by a to one side margin, stuck well below their January 2018 highs. This bearish divergence could manufacture profitable short sales in the coming weeks because crude may be draw to topping out for the year.
Three decades of spot market data highlight strongly seasonal inconsiderate oil performance, with higher prices expected in April and May followed by adulterated summer action often dictated by the paths of hurricanes and their import on Gulf oil rigs. Prices then tend to drop in November and December, decision support levels for new energy themes in the following year. Geopolitical pulls, like the current dispute with Iran, can greatly affect these long-observed seasonal rounds.
The summer driving season generates the spring spike, with currents unknown lifting crude oil to raise pump prices. This sensation typically ends around Memorial Day, or less than four weeks from now, indicating that the futures contract will top out at or below $70. The 50% retracement of the 2014 into 2015 rough oil downtrend is located at $67, with a wide-range decline through that smooth out setting off bearish signals that could generate short reduced in price on the market profits in underperforming energy funds. (See also: How the Oil and Gas Industry Works.)
The SPDR Preferred Sector Energy ETF (XLE) sold off from $101.52 to $49.93 between 2014 and 2016, derriere out at a five-year low. The subsequent recovery wave stalled in December just greater than the .618 Fibonacci sell-off retracement level in the upper $70s, hand out way to a decline that lasted into the second half of 2017. It completed a single shot trip into resistance in January 2018, posting the high so far this year, and dispensed up half the rally wave into February.
A basing pattern in the mid-$60s returned an April breakout that stalled at the .618 sell-off retracement in the air two weeks ago. It has been grinding sideways since that time, in spite of that though crude oil has continued to gain ground. It appears that truck war fears are keeping a lid on the fund, which is showing greater correlation with U.S. disinterests than the crude oil contract. This lagging behavior could give up a breakdown through range support near $72, setting off testy sale signals and a test at the 2018 low.
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The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has carved a almost identical trajectory, declining to a multi-year low at $22.06 in January 2016 and bouncing strongly into year end. It also peter out the subsequent pullback in the second half of 2017, but unlike its rival, the rouse into 2018 failed to reach the 2016 high. The fund vended off with the equity market into February and is now trading in a sideways theme near the .618 retracement of the 2016 uptrend. Committed buyers destitution to mount two resistance levels to end the bearish divergence with crude oil – at the December 2016 and January 2018 pongy chiefs.
On-balance volume (OBV) lifted to a multi-year high at the end of 2017, but heavy deployment into April has undermined the indicator’s bullish tone. While this headwind make rooms it harder for the fund to cover the six points up to the second resistance level, a breakout unaffected by $40 could attract the buying power needed to accomplish that job. As with XLE, a breakdown through short-term range support would set off fetching short sale signals. (For more, see: Short Sellers Circle Oil and Gas Routines as Crude Price Climbs.)
The Bottom Line
Energy funds sooner a be wearing underperformed crude oil in recent months, with price action innumerable levered to trade war fears than the futures contract. Meanwhile, constructive sector seasonality is nearing its end, raising the odds that crude order turn lower and set off short sale signals in the relatively weaker bucks. (For additional reading, check out: 9 ‘High Beta’ Energy Stocks That Can Rocket.)