Oil prices surged to a 12-month high Wednesday after the Energy Information Administration (EIA) reported a 994,000-barrel drawdown in crude inventories for the week ending Jan. 31, indicating a recovery in demand. Analysts had expected a 446,000-barrel rise.
- Oil prices reached a 12-month high Wednesday after the EIA reported a 994,000-barrel drawdown in crude inventories.
- Energy Select Sector SPDR Fund (XLE) shares retraced to the $40 level, where price finds a confluence of support from the 50-day simple moving average (SMA) and early-August swing high.
- The Direxion Daily Energy Bull 2X Shares (ERX) finds support from a multi-month horizontal line and the 50-day SMA.
The commodity also received a boost from the OPEC+ group's decision Wednesday to keep production at the same levels agreed upon at the January meeting. Last month, the alliance agreed to ease February production cuts by a meager 75,000 barrels per day (bpd), while the cartel's top producer Saudi Arabia plans to slash output by an additional 1 million bpd beyond its quota over the next two months. "The oil market continues to look for better days ahead with an increasing rollout of the (coronavirus) vaccine, encouraging demand, while OPEC+ continues to restrain production, causing worldwide inventories to decline," Andrew Lipow of Lipow Oil Associates told Reuters.
Those who want to take advantage of higher oil prices should take a closer look at these two exchange-traded funds (ETFs) that provide exposure to some of the industry's biggest companies. Let's review the metrics of each fund and turn to the charts to identify possible trading opportunities.
Energy Select Sector SPDR Fund (XLE)
With an enormous asset base of $13.58 billion, the Energy Select Sector SPDR Fund seeks to provide a similar return to the Energy Select Sector Index – a benchmark comprising U.S. energy companies in the S&P 500. Industry heavyweights Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) carry a combined weighting of 44.54% in a portfolio of 27 holdings. Trading wise, over 30 million shares exchange hands per day on a 0.02% average spread to minimize transaction costs. As of Feb. 4, 2021, XLE offers an attractive 5.62% dividend yield and is trading 10% higher year to date (YTD). Over the past year, the fund has slipped 20.86%.
Over the past two weeks, XLE shares have retraced to the $40 level, where price finds a confluence of support from the 50-day SMA and early-August swing high. Wednesday's 4.27% rally from this area opens the door for a possible move up to crucial overhead resistance at $55.50. Manage risk by placing a stop-loss order under last week's swing low at $38.94 and amending it to the breakeven point if the price climbs above this year's high at $45.
The breakeven point for a stock trade is determined by comparing the market price of an asset to the original cost. The breakeven point is reached when the two prices are equal.
Direxion Daily Energy Bull 2X Shares (ERX)
Launched in 2008, the Direxion Daily Energy Bull 2X Shares aims to return twice the daily performance of the Energy Select Sector Index, effectively making it a leveraged version of XLE. The fund, designed for short-term tactical trading, suits those who have greater risk tolerance and want a more aggressive bet on the sector. Around 5 million shares turn over each day on average penny spreads, making it straightforward for traders to enter and exit positions. As of Feb. 4, 2021, ERX controls assets under management (AUM) of $421.83 million, issues a 2.35% dividend yield, and has gained 19.79% since the start of the year. Over the past 12 months, the ETF has fallen 85.26%.
In recent trading sessions, the bulls have defended the $16 level – an area on the chart that finds support from a multi-month horizontal line and the 50-day SMA. Those who buy here should look for the price to close the March 9, 2020, gap at $54.20 that aligns with the 38.2% Fibonacci retracement level stretched across last year's pandemic-induced selloff. Protect capital by placing a stop order somewhere under this month's low at $14.98.
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are 23.6%, 38.2%, 61.8%, and 78.6%. While not officially a Fibonacci ratio, 50% is also used.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.